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![WeAre Still Losing the CompetitiveAdvantage
2007 American Electronics Association
27
1. Dave Barry, “Ireland, land of Bad Elvis,” The Miami Herald, July 2,
2006.
2. “Tiger, tiger, burning bright,” The Economist, October 14, 2004.
3. “Why worry?,” The Economist, October 14, 2004.
4. Quoted in Fareed Zakaria, The Future of Freedom: Illiberal Democracy
at Home and Abroad. (W.W. Norton & Company, 2003), 53.
5. U.S. National Science Foundation, Science & Engineering Indicators
(2006), Appendix 2-37.
6. U.S. National Science Foundation, “S&E Doctorates Hit All-time High
in 2005,” Info Brief, November 2006.
7. Ibid, Science & Engineering Indicators (2006), Appendix 2-40.
8. Ibid, Appendix 2-42 and Appendix 2-43.
9. Andrew Batson, “China Close to Ending Global Firms’ Tax Break,”
The Wall Street Journal, January 25, 2007.
10. International Monetary Fund, World Economic Outlook Database.
11. News Release, “China and India Jockey for the Top Most Attractive
Foreign Direct Investment Destination Globally While the U.S. Is
Challenged by These Rapidly Evolving Economies,” A.T. Kearney,
October 12, 2004.
12. Paul Blustein, “China Passes U.S. In Trade With Japan,” The
Washington Post, January 27, 2004.
13. National Intelligence Council, Mapping the Global Future (Central
Intelligence Agency, December 2004), 11.
14. U.S. National Science Foundation, Science & Engineering Indicators
(2006), Appendix 2-37.
15. “Talent shortage driving up Chinese salaries,” Asia Times, January
23, 2007; based on research conducted by Mercer Human
Resources Consulting.
16. Howard W. French, “China Luring Scholars to Make Universities
Great,” The New York Times, October 28, 2005.
17. Organization for Economic Cooperation and Development (OECD),
OECD Science, Technology, and Industry Outlook (2006).
18. U.S. National Science Foundation, Science & Engineering Indicators
(2006), Appendix 5-41.
19. Ibid, Appendix 6-12.
20. Ibid, Appendix 5-61.
21. Michael Mainville, “Russia bears fruit: The West may fault Putin, but a
growing middle class savors his vision of democracy,” The San
Francisco Chronicle, February 1, 2007.
22. Nicolas Mokhoff, “Russia boosts tech venture funds,” The EE Times,
August 10, 2006.
23. “The rise of nearshoring,” The Economist, December 1, 2005.
24. Quote by Janos Koka, Hungarian Minister of Economy and
Transport, in: “Upward trends in eastern europe,” FDI Magazine,
January 30, 2007.
25. “The rise of nearshoring,” The Economist, December 1, 2005.
26. ITU World Telecommunications Indicators Database.
27. Sarah Lacy, “America: Still the High-Speed Laggard,” BusinessWeek,
April 6, 2005.
28. ITU World Telecommunications Indicators Database.
29. Sarah Lacy, “America: Still the High-Speed Laggard,” BusinessWeek,
April 6, 2005.
30. Brian Bremner, “China’s Online Gaming Craze,” BusinessWeek, July
24, 2006.
31. Eric Sylvers, “In Italy, a ‘love to talk’ feeds cell phone bonanza,”
International Herald Tribune, April 28, 2003.
32. National Intelligence Council, Mapping the Global Future (Central
Intelligence Agency, December 2004), 35.
33. First Annual Report of the National Science Foundation, 1950-51.
34. The President’s FY 2008 Budget is available at:http://www.white-
house.gov/omb/budget/fy2008/budget.html; the House FY 2007
Continuing Resolution is available at: http://thomas.loc.gov/cgi-
bin/query/z?c110:H.J.RES.20: [Accessed February 22, 2007]
35. U.S. National Science Foundation, Science & Engineering Indicators
(2006), Appendix 4-6.
36. Ibid, Appendix 4-1 and Appendix 4-6.
37. Ibid, Appendix 4-32.
38. China National Tax Affairs Bureau. Available in Chinese at:
http://www.chinatax.gov.cn/print.jsp?code=200309241006475384
[Accessed February 7, 2005]
39. OECD, OECD Science, Technology and Industry Working Papers 4,
“Tax Treatment of Investment in Intellectual Assets: An International
Comparison,” (2006).
40. U.S. National Science Foundation, Science & Engineering Indicators
(2006), Appendix 4-55.
41. Rodger W. Bybee, “The Sputnik Era: Why Is This Educational Reform
Different From All Other Reforms?” Prepared for the Symposium
“Reflecting on Sputnik: Linking the Past, Present, and Future of
Educational Reform” (Washington, DC, October 4, 1997).
42. Fareed Zakaria, “Rejecting the Next Bill Gates,” Newsweek,
November 29, 2004.
43. U.S. Department of Education, National Center for Education
Statistics.
44. Ibid.
45. International Association for the Evaluation of Educational
Achievement, Third International Mathematics and Science Study
(TIMSS).
46. Organization for Economic Cooperation and Development (OECD),
Programme for International Student
Assessment (2003).
47. The Times Higher Education Supplement, World University Rankings
(2006).
48. AeA, Cyberstates; and the U.S. Bureau of Labor Statistics.
49. U.S. Department of Education, National Center for Education
Statistics.
50. Ibid.
51. The College Board, Trends in College Pricing (2005).
52. Ibid; and The U.S. Census Bureau, Income, Poverty, and Health
Insurance Coverage in the United States (2005).
53. The College Board, Trends in Student Aid (2005).
54. Ibid.
55. U.S. Department of Education, National Center for Education
Statistics.
56. Immigration Policy Center, In Focus, August 2004, Volume 3, Issue 3.
57. Council of Graduate Schools, Findings From 2006 CGS International
Graduate Admissions Survey Phase 1: Applications, March 2006.
58. U.S. National Science Foundation, Science & Engineering Indicators
(2006), Tables 3-1 and 3-19.
59. Duke University, Master of Engineering Math Program, and the
University of California at Berkeley, School of Information, America’s
New Immigrant Entrepreneurs, January 2007.
60. Brent Hunsberger, “Temporary Skilled Worker Visas Run Out,” The
Oregonian, June 9, 2006.
61. U.S. National Science Foundation, Science & Engineering Indicators
(2006), Appendix 3-17.
62. U.S. Census Bureau.
CITATIONS](https://image.slidesharecdn.com/03f223be-ffbe-4b2d-870e-7977810d3626-150529210340-lva1-app6892/75/AeA-report-Losing-the-Competitive-Advantage-29-2048.jpg)
![Following the release of the initial Losing the Competitive Advantage report in February 2005, AeA embarked on an
ongoing effort to educate policymakers, the media, and the general public on the most timely and relevant issues to the
high-tech industry and to U.S. competitiveness in a global economy.
The result has been the AeA Competitiveness Series, an array of concise, four-page reports that combine rigorous data
with careful analysis to provide readers the information they need to assess the issue. To date, AeA has published 13
installments of the series and is continuing to add to this collection. Reports currently in preparation address issues such
as eHealth, international trade, and the rise of China.
All reports can be downloaded for free at: wwwwww..aaeeaanneett..oorrgg//ccss.
Select editions of the Competitiveness Series include:
The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry
and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide
industry leaders and policymakers the information they need to assess the issue.
Analysis
China is an enormously important economic partner for the
United States in terms of both trade and investment. Our
economies are intricately linked across many sectors, partic-
ularly in the production and sale of high-technology goods.
And, our economies are becoming more interdependent
everyday.
China is the sixth largest destination for U.S. high-tech
exports. Currently, Hong Kong is not included in these
statistics. If it were included, China and Hong Kong
combined would be the third largest buyer of American tech
products.
Like It or Not, China and the U.S. Are Intricately Linked
Both Economies Benefit from Growing Trade and Investment
$28.1
$27.3
$13.2
$9.1
$9.0
$8.7
$8.6
$8.6
$7.8
$7.710. Hong Kong
9. Singapore
8. Germany
7. Taiwan
6. China
5. South Korea
4. United Kingdom
3. Japan
2. Canada
1. Mexico
(IN BILLIONS OF CURRENT U.S. DOLLARS)
Source: U.S. Census Bureau
Overview
BETWEEN 1998 AND 2004, U.S. TECH EXPORTS TO CHINA
NEARLY TRIPLED, FROM $3.0 BILLION TO $8.7 BILLION.
ONLY FIVE COUNTRIES ARE LARGER EXPORT DESTINATIONS FOR
AMERICAN TECH PRODUCTS THAN CHINA; TRENDS INDICATE
CHINA COULD RAPIDLY MOVE UP THE RANKS.
BETWEEN 1998 AND 2004, U.S. TECH IMPORTS FROM CHINA
QUADRUPLED, FROM $16 BILLION TO $68 BILLION.
U.S. DIRECT INVESTMENT IN CHINA TOTALED $15.4 BILLION IN
2004, A 34 PERCENT INCREASE OVER 2003.
CHINESE INVESTMENT IN THE U.S. REMAINS SMALL BUT IS
RISING, UP 59 PERCENT FROM 2003 TO 2004.
PUBLIC POLICY IN BOTH CHINA AND THE UNITED STATES MUST
RECOGNIZE THE INCREASINGLY INTEGRATED NATURE OF OUR
ECONOMIES; PROTECTIONIST MEASURES ON EITHER SIDE ONLY
SERVE TO RESTRICT MARKET ACCESS TO CHINA WHILE RAISING
PRICES ON CONSUMER GOODS FOR AMERICANS.
Volume 4 November 2005
Timely research reports on keeping the United States
competitive in a global economy
The
Competitiveness Series
LEADING DESTINATIONS FOR
U.S. HIGH-TECH EXPORTS
2004
U.S. Direct Investment Abroad to China
2003 2004 ‘03-’’04
Computers & Electronic
Products $1,300 $1,800 38%
Total All Industries $11,500 $15,400 34%
Chinese Foreign Direct Investment in the United States
2003 2004 ‘03-’’04
Computers & Electronic
Products n/a n/a n/a
Total All Industries $309 $490 59%
FOREIGN DIRECT INVESTMENT
BETWEEN THE U.S. AND CHINA
2003 - 2004
(IN MILLIONS OF CURRENT U.S. DOLLARS)
2005 American Electronics Association
Source: U.S. Bureau of Economic Analysis
This installment of the AeA Competitiveness Series
provides an initial analysis of the U.S.-China economic
relationship with a focus on the high-tech industry. It
does not specifically address the many serious policy
issues currently impacting trade and investment between
the two countries.
With this first report on China, AeA offers the data critical
to understanding the U.S.-China economic linkages. AeA
will follow up with another report in 2006 that addresses
some of the major policy concerns.
The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry
and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide
industry leaders and policymakers the information they need to assess the issue.
Analysis
Throughout our history, the United States has benefited from
attracting many of the most talented minds on the planet. As
a nation of immigrants, the United States found a winning
formula; these emigrees pursued opportunities they could
not find elsewhere and we aas aa ccountry ggained ttheir eentre-
preneurship, iintellect, hhard wwork aand sskills, aand tthe tthou-
sands oof jjobs tthey ccreated iin tthe UUnited SStates.
Though much recent public debate has focused on unskilled,
illegal immigration, an entirely different but essential category
is often neglected: high-skilled, legal immigration.
Specific visa classifications have been created to attract the
world’s best and brightest to the United States. The most
common are the H-1B and L-1, temporary visas that allow
highly skilled foreign nationals to work in the United States
for up to seven years. Employers who apply for an H-1B visa
must not harm the working conditions of the current work-
force, and they must pay the visa holder the prevailing or
actual wage for that position (whichever is higher).
But is the system meeting the needs of an economy that is
fueled by skills and innovation at a time when other coun-
tries are aggressively competing for the same talent?
The caps on H-1Bs are met sooner and sooner every year.
The 22007 ccap wwas rreached ffour mmonths bbefore tthe sstart oof
the ffiscal yyear. L-1 holders are forced to leave the country
because their green card application is not approved by the
time the visa expires. Foreign graduates of American univer-
sities cannot obtain visas or green cards to stay in the coun-
try, despite having multiple employment offers. And many in
the pipeline to come here simply choose to seek opportuni-
ties in countries where they feel more wanted.
They are confounded by the bureaucracy. The waits are too
long and the regulations too inflexible. Foreign nationals of
any single country can receive no more than seven percent
of available green cards in a specific year. In effect this
discriminates against individuals from populous nations that
possess huge talent pools, like China and India.
Attracting the Best and Brightest to the United States
Reforming High-Skilled Visa Policy
Volume 9 June 2006
2006 American Electronics Association
Overview: SSkilled FForeign NNationals iin tthe UUnited SStates
1 OF EVERY 4 SCIENTISTS AND ENGINEERS IN THE UNITED STATES
IS FOREIGN BORN.
HALF OF DOCTORAL COMPUTER SCIENCE AND MATH DEGREES
AND 60 PERCENT OF DOCTORAL ENGINEERING DEGREES AWARDED
IN THE UNITED STATES GO TO FOREIGN NATIONALS.
OVER 40 PERCENT OF MASTER’S DEGREES IN ENGINEERING,
COMPUTER SCIENCE, AND MATH AWARDED IN THE UNITED STATES
GO TO FOREIGN NATIONALS.
NEARLY HALF OF ALL NOBEL PRIZES AWARDED TO RESEARCHERS IN
THE UNITED STATES BETWEEN 1901 AND 1991 WERE WON BY
FOREIGN-BORN INDIVIDUALS OR THEIR CHILDREN.
THESE INDIVIDUALS ARE AMONG THE WORLD’S BEST AND BRIGHT-
EST; AMERICA’S TECHNOLOGICAL PREEMINENCE IS AT LEAST IN PART
BASED ON THEIR CONTRIBUTIONS TO OUR ECONOMY; THEY
CONDUCT CUTTING EDGE RESEARCH, LAUNCH INNOVATIVE
COMPANIES, AND CREATE MILLIONS OF HIGH-PAYING JOBS.
Timely research reports on keeping the United States
competitive in a global economy
The
Competitiveness Series
High-SSkilled IImmigration --- DDefinitions
EB ((EMPLOYMENT-BBASED) GGREEN CARD --- Temporary visas are
often the first step in the longer-term process of gaining perma-
nent residency --- the so-called green card. The EB category
allows foreign nationals to obtain permanent residency based
on possessing specialized employment skills.
H-11B --- A visa classification for foreign nationals to be
employed in a specialty occupation for a maximum of six years
with exceptions. The candidate must hold a bachelor’s degree
or its equivalent knowledge, both theoretical and applied.
L-11 --- A visa classification for individuals transferring internally
from a foreign office to a U.S. office of the same company on a
temporary basis. Candidates must be managers/executives or
have specialized knowledge.
F-44 --- Currently under legislative consideration, this student visa
would go to doctoral candidates in science, technology, engi-
neering, or math and would be convertible to permanent resi-
dent status upon gaining employment after graduation.
The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry
and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide
industry leaders and policymakers the information they need to assess the issue.
Just What Is RFID?
At the most basic level, radio frequency identification (RFID)
is a method for wireless identification. While many see RFID
as a new technology, it has actually been in use for over 60
years. It proved to be a critical technology during World
War II, used by the British Royal Air Force to identify friendly
airplanes. The big difference today is that it is being applied
in new ways, spurred on by technology advancements and
decreased costs.
This paper provides an overview of how RFID technology
works and outlines the numerous benefits from the technol-
ogy, many of which are already in use.
How RFID Works
Conceptually, RFID can be compared to the current barcode
system, although it utilizes much more advanced electronics
technology. RFID allows stored information on chips to be
transmitted over radio waves. An RFID tag can be attached
to or incorporated into a wide range of products and items,
from warehouse pallets and consumer products to livestock
and credit cards.
RFID tags store specific information that is transmitted
through radio waves when activated. This information can
be generic, such as a barcode (identifying what the product
is --- e.g., nonfat milk, 1 gallon) or unique, such as a serial
number (identifying this one specific item --- e.g., nonfat milk,
1 gallon, expires on, bottling company, lot number).
More sophisticated RFID tags can be both read and written
to, storing additional information on the chip, and a few can
even perform basic computational functions. Currently,
most RFID tags are read-only devices that contain a unique
identification number, which then matches the number with
a database. This is similar to license plates, which are only
random numbers until matched to a DMV database that
contains the identifying information.
RFID tags are either passive or active. A passive RFID chip
--- the most typical --- does not have an internal power source
and will transmit a response only when an incoming radio
signal provides the power through the antenna. Passive
RFID chips do not constantly send out signals, but must be
activated by an external source. Passive RFID tags can be
RFID 101: Benefits of the Next Big Little Thing
Part 1 of a 2 Part Analysis
Volume 5 December 2005
2005 American Electronics Association
Overview
RFID TECHNOLOGY INCREASES THE EFFICIENCY OF SUPPLY
CHAINS, REDUCING LABOR EXPENSES BY UP TO 7.5 PERCENT
AND INCREASING SALES BY UP TO 3 PERCENT.
RFID TECHNOLOGY SECURES OUR PROPERTY, PREVENTS THEFT,
AND SAVES LIVES.
THE RFID MARKET IN 2005 IS ESTIMATED TO GENERATE $1.7
BILLION IN PRODUCTS AND SERVICES.
THIS REPORT EXPLORES THE BASICS OF WHAT RFID TECHNOLOGY IS
AND DISCUSSES THE CURRENT AND FUTURE POTENTIAL BENEFITS FOR
THE UNITED STATES.
AeA WILL FOLLOW UP THIS REPORT WITH ANOTHER TITLED “RFID:
SECURITY, PRIVACY, AND POLICY CONCERNS.” AS SUCH, THIS
REPORT PURPOSELY DOES NOT ADDRESS THESE ISSUES.
Timely research reports on keeping the United States
competitive in a global economy
The
Competitiveness Series
How RFID Works
Examples of items
that can contain an
RFID tag.
The RFID reader transmits
a radio signal.
Once the tag and the
reader authenticate one
another in a “handshake,” the
tag sends its information to the
reader.
The RFID tag consists of:
(1) a chip that typically contains
a unique identifying serial
number, and
(2) an antenna that transmits
the data to a reader with the
appropriate authorization.
Passive RFID chips contain no
internal power source and can
transmit data only when a
reader sends them a signal.
The reader transmits data
to the database for processing
(e.g., debiting an “EZ pass”
account or logging movement
in a supply chain).
A secure database contains
the identifying information
associated with the serial
number on the tag.
1
The radio
signal activates
the RFID tag.
2
3
4
The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry
and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide
industry leaders and policymakers the information they need to assess the issue.
Analysis
A midyear analysis of employment data through June 2006
shows the U.S. high-tech industry continues to add jobs
steadily and across a variety of sectors. Data collected by
the U.S. Bureau of Labor Statistics and compiled by AeA
indicate that the tech industry has generated a net increase
in jobs in the United States for five consecutive months and
for nine of the previous 12 months.
The U.S. high-tech industry added 140,200 net jobs between
January and June of 2006, a 2.5 percent increase, for an
industry total of 5.81 jobs. This is nearly double the 78,900
tech jobs added in the first half of 2005. Nonetheless, the
January to June 2006 tech job growth lags that of the U.S.
private sector, which rose by 3.5 percent over that period.
The industry has also added jobs over the last 12 months.
Tech employment as of June 2005 stood at 5.65 million,
compared to 5.81 million in June 2006. This represents an
increase of some 150,000 jobs, or 2.7 percent.
U.S. Tech Industry Adds 140,000 Jobs in First Half of 2006
Tech Manufacturing Employment Up for Second Year in a Row;
Communications Services Adds Jobs for First Time Since 2000
5.0
5.5
6.0
5.58 5.59 5.59 5.60 5.61
5.65 5.66 5.66 5.65
5.67 5.69 5.69
5.67
5.69 5.70
5.73
5.75
5.81
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2006
MAY
2006
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2006
MAR
2006
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2006
JAN
2006
DEC
2005
NOV
2005
OCT
2005
SEP
2005
AUG
2005
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2005
JUN
2005
MAY
2005
APR
2005
MAR
2005
FEB
2005
JAN
2005
HIGH-TECH EMPLOYMENT TRENDS*
(JANUARY 2005 - JUNE 2006)
2006 American Electronics Association
Overview
THE U.S. HIGH-TECH INDUSTRY EMPLOYED 5.8 MILLION
PEOPLE AS OF JUNE 2006, THE HIGHEST LEVEL SINCE 2002.
THE TECH INDUSTRY ADDED NEARLY 140,000 JOBS IN THE
FIRST HALF OF 2006, NEARLY DOUBLE THE GROWTH OF THE
SAME PERIOD IN 2005.
NONETHELESS, JANUARY TO JUNE 2006 TECH JOB GROWTH
LAGGED THAT OF THE U.S. PRIVATE SECTOR, 2.5 PERCENT
COMPARED TO 3.5 PERCENT.
HIGH-TECH MANUFACTURING ADDED JOBS FOR THE SECOND
CONSECUTIVE YEAR, 33,100 IN THE LAST SIX MONTHS.
THE HIGH-TECH SERVICES SECTORS ADDED 107,000 U.S.
JOBS IN THE LAST SIX MONTHS, A RISE OF 2.5 PERCENT.
WITHIN THE HIGH-TECH SERVICES SECTORS EMPLOYMENT
GROWTH WAS LED BY ENGINEERING AND TECH SERVICES
(+49,800), FOLLOWED BY SOFTWARE SERVICES, (+44,500),
FOLLOWED BY COMMUNICATIONS SERVICES (+12,700).
Volume 12 September 2006
Timely research reports on keeping the United States
competitive in a global economy
The
Competitiveness Series
(INMILLIONS)
*Not adjusted for seasonal variances
+229,200 jobs
+4.1%
+140,200 jobs
+2.5%
+78,900 jobs
+1.4%
The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry
and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide
industry leaders and policymakers the information they need to assess the issue.
Analysis
Network neutrality is a wide ranging concept with many
facets and many different groups trying to define what it
means. Unfortunately, much of the current debate is being
driven by network operators, resulting in a one-sided view,
full of misleading information.
This paper focuses on addressing these misperceptions and
on the most contentious part of the debate, the discrimina-
tion of Internet traffic on the basis of source or ownership of
content.
When the Internet was first built it was designed to be
content neutral; its purpose was to move data from one
place to another in a nondiscriminatory fashion regardless of
who provided the original content.
Initially, the Federal Communications Commission (FCC)
enforced this principle by requiring nondiscriminatory treat-
ment by the telecom carriers, where content was delivered
on a “best effort” basis, i.e., by treating all “packets” as
relatively equal.
However, this changed in August 2005 when the FCC effec-
tively removed the legal protection of content neutrality for
all broadband Internet access providers.
This outcome clearly favored telecom carriers. Edward
Whitacre Jr., the former CEO of SBC Communications,
claimed in BusinessWeek that Internet content providers
“use my lines for free --- and that’s bull.” BellSouth’s Chief
Technology Officer, William Smith, told reporters that his
firm should be able to charge content providers for the
opportunity for prioritizing their content. And, Verizon
Communications’ Chief Executive Ivan Seidenberg said,
“We have to make sure [content providers] don’t sit on our
network and chew up our capacity.”
Some broadband providers want to be able to offer priority
service to those content providers who agree to pay an addi-
tional fee beyond what they already pay to access the
Internet. Those who can afford to pay the fee would have
their content moved to the front of the line.
These carriers claim that the next generation of Internet
content (such as videos, voice over IP, real-time gaming, and
distance learning) requires higher levels of speed and qual-
ity than other content, and as a result, must be prioritized
ahead of other Internet traffic. To pay for this increased
capacity, the network operators argue that they need addi-
tional revenue.
The Case for Preserving Network Neutrality
Keep Innovation and Competition on the Internet
Overview
NETWORK NEUTRALITY INCLUDES THE CONCEPT THAT TELE-
COM AND CABLE COMPANIES, WHICH PROVIDE OVER 92
PERCENT OF CONSUMER BROADBAND INTERNET ACCESS,
SHOULD BE PROHIBITED FROM DISCRIMINATING IN THEIR
TREATMENT OF INTERNET TRAFFIC.
THERE IS THE MISPERCEPTION THAT CONTENT PROVIDERS DO
NOT PAY NETWORK OPERATORS FOR ACCESS TO THE INTER-
NET. A CONSERVATIVE ESTIMATE SHOWS THAT NETWORK
OPERATORS RECEIVE AT LEAST $13.1 BILLION ANNUALLY FROM
THE 7.3 MILLION BUSINESS INTERNET SUBSCRIBERS, WHICH
INCLUDE CONTENT PROVIDERS OF ALL SIZES.
NETWORK OPERATORS ARGUE THAT NET NEUTRALITY WOULD
DESTROY COMPETITION AND INNOVATION ON THE INTERNET;
THIS IS FALSE. IN FACT, THE U.S. ECONOMY HAS GROWN
TREMENDOUSLY AS A RESULT OF NETWORK NEUTRALITY, THE
GUIDING PRINCIPLE SINCE THE INCEPTION OF THE INTERNET.
AeA SUPPORTS A CONTENT-NEUTRAL INTERNET THAT MAIN-
TAINS LOW BARRIERS TO ENTRY, PROVIDES UNFETTERED ACCESS
TO LAWFUL CONTENT, AND PROMOTES COMPETITION.
CONGRESS NEEDS TO PROTECT CONSUMERS BY AUTHORIZING
THE FCC TO ENFORCE THESE PRINCIPLES, PREVENTING
DISCRIMINATION ON THE INTERNET.
Volume 11 September 2006
Timely research reports on keeping the United States
competitive in a global economy
The
Competitiveness Series
2006 American Electronics Association
“I hope that Congress can protect net neutrality, so I can
continue to innovate in the internet space. I want to see
the explosion of innovations happening out there on the
Web, so diverse and so exciting, continue unabated.”
Tim Berners-Lee
“Creator of the World Wide Web”
The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry
and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide
industry leaders and policymakers the information they need to assess the issue.
Analysis
The Peruvian Free Trade Agreement holds the promise of
new opportunities and expanded markets for U.S. high-
tech merchandise exporters, manufacturers, services
providers, and their employees.
While Peru is a small market when compared with many
of America’s other trading partners, it is a strong market
for technology products. U.S. high-tech exports to Peru
grew by 10 percent in 2005 and have jumped by 23
percent over the last six years. The United States export-
ed $428 million in technology merchandise to Peru in
2005.
The United States holds a strong high-tech surplus with
Peru: $421 million in 2005. Lowering barriers gives U.S.
companies a competitive edge in selling their products.
U.S. HIGH-TECH TRADE WITH PERU
1999 - 2005
(IN MILLIONS OF CURRENT U.S. DOLLARS)
Overview
U.S. HIGH-TECH EXPORTS TO PERU TOTALED $428 MILLION
IN 2005, UP 10 PERCENT FROM 2004.
THE UNITED STATES HAD A HIGH-TECH TRADE SURPLUS OF
$421 MILLION WITH PERU IN 2005.
AS A PART OF THIS AGREEMENT, PERU WILL JOIN THE WTO’S
INFORMATION TECHNOLOGY AGREEMENT, WHICH REMOVES
TARIFF AND NON-TARIFF BARRIERS TO TECHNOLOGY
PRODUCTS.
A PERUVIAN FREE TRADE AGREEMENT GIVES U.S. COMPANIES
A COMPETITIVE EDGE AND HELPS OUR SOUTH AMERICAN
NEIGHBOR EMBRACE FREE MARKETS. FAILURE TO PASS A FREE
TRADE AGREEMENT WITH PERU CEDES OUR COMPETITIVE
ADVANTAGE IN THIS REGION TO OTHERS.
Volume 7 March 2006
Timely research reports on keeping the United States
competitive in a global economy
The
Competitiveness Series
Numbers in the boxes
on the graphs repre-
sent the trade surplus.
+$347m
SELECT U.S. TECH EXPORTS TO PERU
1999 VS. 2005
(IN MILLIONS OF CURRENT U.S. DOLLARS)
Note: Data are rounded. 2006 American Electronics Association
+36%
+47%
+15%
-31%
+0%
Free Trade Peru
Building Blocks for Trade and Free Markets in South America
+$394m
+$351m
+$346m
+$387m
+$384m
+$421m
The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry
and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide
industry leaders and policymakers the information they need to assess the issue.
Radio frequency identification (RFID) is an emerging technology
that is often misunderstood. Critics often downplay the benefits
of RFID while exaggerating its risks to personal privacy and
security.
While privacy and security concerns are understandable, they
are also addressable. In December 2005, AeA published a
paper in this series outlining the basics of RFID technology: how
it worked and what benefits it offered.
This current paper drills down a bit deeper. If our first paper
was “RFID 101,” this one can be considered “RFID at the grad-
uate level.” It delves into the specific security, privacy, and
policy concerns associated with widespread usage of RFID.
This paper does not over-hype the potential of the technology,
nor does it dismiss the concerns.
The tech industry is as concerned as anyone about securing the
integrity of personal information. Without a secure system,
RFID technology garners mistrust, and that is bad for business.
RFID already meets the stringent requirements of securing
personal information, and in many ways can do so much more
efficiently than other technologies.
Concerns vary depending on how the technology is used. RFID
can be broken down into two main types of use:
Supply Chain Management; and
Secure ID/Smart Cards
The specific use determines the level of security and privacy
concerns. Tags used in supply chain management want to be
found. To do their jobs, these tags need to convey their loca-
tion and information effectively and efficiently.
On the other hand, Secure IDs or Smart Cards need to hide
themselves from unauthorized use. The information contained
on a Smart Card is valuable and uses strong security measures
to protect and restrict the release of its information.
Recognizing the end goal of the RFID tag helps determine the
security, privacy, and policy goals associated with it.
There are many different ways to address these issues, and the
concerns raised in these cases are often not specific to RFID
technology.
Furthermore, AeA strongly believes that while technology can
provide solutions for protecting privacy, bad behavior also
needs to be punished, and as such we support strong criminal
and civil penalties against those who seek to undermine RFID
systems.
Security and Privacy
Concerns about RFID technology fall into four categories:
Location/Privacy with Supply Chain RFID Tags;
Duplication of RFID-Enabled Secure ID/Smart Cards;
Unauthorized Database Access; and
Compiling/Selling of Personal Buying Habits.
RFID: Security, Privacy, and Good Public Policy
Part 2 of a 2 Part Analysis
Volume 6 February 2006
2006 American Electronics Association
Overview
RFID TECHNOLOGY SECURES OUR PRIVACY, PREVENTS THEFT,
AND SAVES LIVES.
WHILE THERE ARE SOME LEGITIMATE CONCERNS ABOUT RFID
TECHNOLOGY, THEY ARE OFTEN EXAGGERATED AND ADDRESSABLE.
RFID USES AUTHENTICATION MEASURES AND ENCRYPTION TO
PROTECT THE INTEGRITY OF THE SYSTEM.
PREMATURE LEGISLATION COULD HINDER DEVELOPMENT OF
RFID TECHNOLOGY.
THE RFID INDUSTRY HAS WORKED WITH POLICYMAKERS AND
OTHER INTERESTED PARTIES, INCLUDING CONSUMER GROUPS,
IN CREATING THE HIGHEST SECURITY STANDARDS.
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Types of RFID Use
SUPPLY CHAIN MANAGEMENT --- These are RFID tags that want to
be found. Their purpose is to identify and locate a particular
item. As a result, these tags use less security and have fewer
privacy concerns.
SECURE ID/SMART CARDS --- RFID-enabled Secure IDs or Smart
Cards hide information and prevent its illicit use. Their
purpose is to restrict the information on the card to only those
authorized to access it. As a result, these cards use strong
security measures and encryption to protect the information on
the card.
Analysis
Imagine never having to fill out paper forms on a wooden
clipboard every time you enter a new doctor’s office.
Imagine that your entire medical history and profile
belonged to you from cradle to grave, accessible to you and
any medical practitioner that you authorized. Imagine never
delivering a handwritten prescription to a pharmacist or
duplicating a procedure because the previous results were
unknown or inaccessible.
Electronic medical records (EMRs) can make all of this
happen. EMRs are one of the major components of health
information technology that could transform our healthcare
system as we know it. Information technology is not the
end-all-be-all to fix our healthcare system, but it provides a
major step toward that goal.
Information technology (IT) has revolutionized most major
industries. Yet the most vital industry of all --- healthcare ---
is one of the last to embrace the full benefits of IT. Gartner
Research estimates that while the financial services industry
spends over seven percent of its budget on IT, the healthcare
industry spends only three percent.
Instituting a standardized, nationwide EMR network will not
be easy. Every stakeholder must be convinced of the bene-
fits. This includes patients who fear their privacy being
breached, doctors who believe EMRs threaten their work
practices, and hospitals and clinics that wonder how they
are going to pay for such a huge undertaking.
eHealth 101: Electronic Medical Records
Reduce Costs, Improve Care, and Save Lives
Overview
ELECTRONIC MEDICAL RECORDS (EMRS) OFFER A TREMENDOUS
OPPORTUNITY TO REDUCE HEALTHCARE COSTS, IMPROVE
QUALITY OF CARE, AND SAVE LIVES.
ONLY 31 PERCENT OF HOSPITAL EMERGENCY DEPARTMENTS, 29
PERCENT OF OUTPATIENT DEPARTMENTS, AND 17 PERCENT OF
DOCTORS’ OFFICES USE EMRS, ACCORDING TO THE U.S.
DEPARTMENT OF HEALTH AND HUMAN SERVICES.
THE RAND CORPORATION FOUND THAT WIDESPREAD, EFFECTIVE
USE OF EMRS COULD SAVE THE UNITED STATES AT LEAST $162
BILLION AND POTENTIALLY AS MUCH AS $346 BILLION ANNUALLY.
EMRS CAN DRAMATICALLY REDUCE PRESCRIPTION ERRORS; THE
VETERANS AFFAIRS EMR SYSTEM HAS HELPED IT ACHIEVE AN
ERROR RATE OF LESS THAN 0.003 PERCENT, COMPARED TO
THE NATIONAL ERROR RATE OF THREE TO EIGHT PERCENT.
A NATIONALLY INTEGRATED EMR SYSTEM WILL IMPROVE
HEALTHCARE BY ALLOWING RESEARCHERS ACCESS TO VAST
DATASETS --- DETACHED FROM PERSONAL INFORMATION --- TO
ANALYZE TRENDS, DETECT PATTERNS, IDENTIFY PROMISING
TREATMENTS, AND FLAG DANGEROUS ONES.
Volume 13 December 2006
Timely research reports on keeping the United States
competitive in a global economy
The
Competitiveness Series
The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry
and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide
industry leaders and policymakers the information they need to assess the issue.
2006 American Electronics Association
ELECTRONIC MEDICAL RECORDS --- DEFINED
Electronic medical records (EMRs) are portable computer-
based patient medical records that reside within an integrated
system that allows authorized medical staff access to patient
information from any given location.
Fully integrated EMRs include patient medical history,
physician and clinical staff notes, automated checks for
drug and allergy interactions, clinical decision support
systems, computerized orders for prescriptions and lab
tests, test results, billing, and scheduling capabilities.
$77 billion
$4 billion
$81 billion
$346 billion
$7.7 billion
Estimated annual cost of implementing EMRs over 15 years
Annual savings from all of the above categories combined with improved
care resulting from use of the data to analyze treatment methods
Annual savings from improved management of chronic disease
Annual savings from improved safety,
primarily reduced prescription errors
Annual savings from increased efficiencies
and reduced duplication of procedures
Source: RAND
ELECTRONIC MEDICAL RECORDS
Cost of Implementation vs. Potential Savings
The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry
and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide
industry leaders and policymakers the information they need to assess the issue.
Analysis
Research and development (R&D) is the building block of
future economic growth and prosperity. R&D generates
scientific breakthroughs, spawns innovative products and
processes, and enhances productivity. It creates wealth,
intellectual property, and high paying jobs. These benefits
extend far beyond the company or entity doing the research.
The United States has long recognized the economic bene-
fits of encouraging R&D, whether performed by government
entities, academic institutions, or private companies. Each
has played a pivotal role in contributing to America’s
preeminence in science, technology, and innovation over
the second half of the twentieth century. This windfall to our
economy is incalculable.
But the world is changing and continued preeminence is not
assured. In recent years the global market for research and
development has become intensely competitive. Countries
offering tax holidays and incentives are courting American
businesses to perform R&D on their shores.
To meet this competition, the United States must become
more proactive. In 2004, U.S. industry spent $184 billion
on R&D, compared to $86 billion by the U.S. government.
These large industry expenditures are facilitated by tax policy
that provides incentives to the private sector to perform R&D
that would not otherwise result in a return on investment. To
keep these expenditures in the United States the R&D tax
credit --- currently expired --- must be strengthened, renewed,
and made permanent.
Strengthen the R&D Tax Credit and Make It Permanent
American Innovation and Competitiveness Depend on It
Overview
SINCE ITS INCEPTION IN 1981, THE R&D TAX CREDIT HAS
BEEN EXTENDED 11 TIMES, COMPLETELY LAPSED ONCE, AND IS
CURRENTLY EXPIRED.
THE CREDIT IS CLAIMED ANNUALLY BY BETWEEN 14,000 AND
16,000 FIRMS DISTRIBUTED RELATIVELY EVENLY BY SIZE.
THE U.S. BUREAU OF LABOR STATISTICS ESTIMATES THAT EVERY
DOLLAR OF TAX BENEFIT HAS SPURRED AN ADDITIONAL DOLLAR
IN PRIVATE RESEARCH AND DEVELOPMENT.
MANY COUNTRIES HAVE PASSED STRONGER INCENTIVE
PROGRAMS, INCLUDING IMPLEMENTING A PERMANENT TAX
CREDIT, AND ARE ACTIVELY WORKING TO ATTRACT R&D
DOLLARS AND JOBS AWAY FROM THE UNITED STATES.
THE LACK OF A CONSISTENT U.S. R&D TAX CREDIT MAKES
FOREIGN INCENTIVES FOR R&D MUCH MORE ATTRACTIVE TO
COMPANIES. IN 2003, U.S. AFFILIATES INVESTED $28.8
BILLION ON R&D IN FOREIGN COUNTRIES, UP 72 PERCENT
FROM 1999.
Volume 10 August 2006
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2006 American Electronics Association
Source: The R&D Credit Coalition
R&D Tax CCredit - DDefined
The R&D tax credit, officially called the Research and
Experimentation Tax Credit (RETC) was created in 1981
as part of the Economic Recovery Act to encourage U.S.
firms to conduct R&D domestically.
When active, the RETC provides a 20 percent tax credit
for all qualified U.S.-based research and development
expenditures in excess of a calculated amount that is
based on the company’s past R&D expenditures.
Country Tax Incentive
Australia
125% deduction for R&D expenses; 175%
deduction for R&D expenditures exceeding
a base amount of prior-year spending
Canada
A permanent 20% flat R&D tax credit,
combined with many provincial incentives
and tax credits
China
150% deduction for R&D expenditures,
provided that R&D spending has increased
by 10% from the prior year
India
Companies conducting scientific R&D are
entitled to a 100% deduction of profits for
10 years
United SStates
The U.S. R&D tax credit expired on
December 31, 2005
INTERNATIONAL R&D TAX INCENTIVES
Like IIt oor NNot, CChina
and tthe UU.S. AAre
Intricately LLinked
China is an enormously
important economic
partner for the United
States in terms of both
trade and investment,
particularly in the high-
tech sector. This inter-
dependence benefits
both countries.November 22005
RFID 1101: BBenefits oof
the NNext BBig LLittle TThing
How does RFID technol-
ogy work and what are
its current and potential
benefits for the United
States? This report
serves as a primer for
our follow-up report on
privacy and security
concerns associated
with RFID.
RFID: SSecurity, PPrivacy,
and GGood PPublic PPolicy
This second report on
RFID discusses how
authentication and
encryption technologies
protect RFID-enabled
devices from illicit and
malicious use in both
supply chain manage-
ment and Secure
IDs/Smart Cards.
Attracting tthe BBest aand
Brightest tto tthe UUnited
States
The U.S. visa and green
card system that helps
bring the best and
brightest to the United
States is broken. These
highly skilled people
spur U.S. innovation
and create thousands of
high-paying jobs.
eHealth 1101: EElectronic
Medical RRecords
The first in our series on
eHealth, this report
discusses how electronic
medical records (EMRs)
offer a tremendous
opportunity to reduce
healthcare costs,
improve quality of care,
and save lives.
Mid-yyear TTech
Employment UUpdate
The U.S. high-tech
industry added
140,000 jobs in the first
half of 2006, nearly
double the growth of
the same period in
2005. Tech manufac-
turing employment is
rising for the second
year in a row.
The CCase ffor PPreserving
Network NNeutrality
This report makes the
case for promoting
innovation and compe-
tition on the Internet by
upholding the guiding
principles of network
neutrality that have
governed the Internet
since its inception.
Strengthen tthe RR&D TTax
Credit aand MMake IIt
Permanent
This report highlights
how critical industry
funded R&D has been
to the United States.
But the lack of a consis-
tent R&D tax credit
makes foreign incen-
tives for R&D much
more attractive.
Free TTrade PPeru
The Peruvian Free Trade
Agreement promises
new opportunities and
expanded markets for
U.S. high-tech exporters,
manufacturers, services
providers, and their
employees. Peru is a
small but strong and
growing market for tech
products.
December 22006
August 22006
September 22006
June 22006
September 22006
March 22006
February 22006December 22005
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AeA report - Losing the Competitive Advantage
- 1. Access to Investors State,Federal & International Lobbying Insurance Services Government Procurement Business Networking Foreign Market Access Select Business Services Executive Education WE ARE STILL LOSING THE COMPETITIVE ADVANTAGE NOW IS THE TIME TO ACT MARCH 2007 “T“Tonight I announce an onight I announce an American Competitiv American Competitivenesseness InitiativInitiativee,, to encoura to encouragge innoe innovation thr vation throughout our oughout our economeconomyy,, and to giv and to give our nation’ e our nation’s childr s children a firm en a firm grgrounding in math and science ounding in math and science..””PrPresident Georg esident Georgee WW.. BushBush The State of the Union The State of the UnionJanJanuaruary 31,y 31, 20062006 “I w“I would likould like to thanke to thank AeA fAeA for pror prooviding the intellectualviding the intellectual basis fbasis for the Democratic Innoor the Democratic Innovationvation AgAgenda.enda. I want theI want the issue of competitivissue of competitiveness to be truleness to be truly bipary bipartisan.tisan. I don’I don’t wantt want it to pass with just 230 v it to pass with just 230 votes.otes. I want 350 vI want 350 votes to makotes to make thise this a ra real mandate that the countr eal mandate that the country can gy can get behind.et behind.”” SpeakSpeaker of the House Nancy P er of the House Nancy Pelosielosi AeA DC HeadquarAeA DC Headquartersters NoNovvember 16,ember 16, 20062006
- 2. WE ARE STILLLOSING THE COMPETITIVE ADVANTAGE NOW IS THE TIME TO ACT AAeeAA,, AADDVVAANNCCIINNGG TTHHEE BBUUSSIINNEESSSS OOFF TTEECCHHNNOOLLOOGGYY WWRRIITTEERRSS AANNDD RREESSEEAARRCCHHEERRSS MATTHEW F. KAZMIERCZAK VICE PRESIDENT, RESEARCH AND INDUSTRY ANALYSIS, AeA JOSH JAMES SENIOR MANAGER, RESEARCH AND INDUSTRY ANALYSIS, AeA EEXXEECCUUTTIIVVEE EEDDIITTOORR WILLIAM T. ARCHEY PRESIDENT AND CEO, AeA AABBOOUUTT AAeeAA AeA, founded in 1943 by David Packard, is the largest high-tech trade association in the United States with about 2,500 companies representing all segments of the industry and 1.8 million employees. Currently, AeA has 18 offices in and around the United States, as well as offices abroad in Brussels and Beijing. Our primary purpose is helping our members’ top and bottom lines by providing the following services: Access to Investors; State, Federal & International Lobbying; Insurance Services; Government Procurement; Business Networking; Foreign Market Access; Select Business Services; and Executive Education. AeA’s unique grassroots network promotes and represents the business interests of America’s technology industry. We provide competitive products and services to our members and lead in education and advocacy on a variety of high-tech business issues. They include: Sarbanes Oxley Section 404 reform; RFID initiatives; broadband deploy- ment; preventing harmful Internet privacy legislation; making the research and develop- ment tax credit permanent; seeking updated export controls legislation; working with U.S. trade negotiators to achieve high-tech industry negotiating objectives within new international trade agreements; limiting the government’s regulation and taxation of the Internet; promoting education reform; lowering capital costs for emerging technology companies; and supporting human resource and immigration policies that ensure access to the most qualified and highly educated workers. From the well known giants of the high-tech world to the next generation of dynamic, smaller companies, AeA’s members create products that promote innovation and effi- ciency in virtually every industry and business sector in the United States and throughout the world. The impact of high-tech products on people’s everyday lives is immeasura- ble. High-tech products keep people safer and healthier, enable them to be more productive at home and on the job, and contribute to a better quality of life. Whether it is medicine or national security, education or agriculture, environment or entertain- ment, the high-tech industry is omnipresent and is inextricably linked to the advancement of modern society. For information about AeA and the high-tech industry, please visit our website at www.aeanet.org. Copyright © 2007 by the American Electronics Association To obtain additional copies of this report, visit AeA’s website at www.aeanet.org/competitiveness. All rights reserved. No part of this work covered by the copy- rights hereon may be reproduced or copied in any form or by any means --- graphic, electronic, or mechanical, including photo- copying, recording, taping, or information storage and retrieval systems --- without the express written permission of the American Electronics Association. AeA has made every reasonable effort to assure the accuracy of the information in this publica- tion. However, the contents of this publication are subject to changes, omissions, and errors, and AeA accepts no liability for inaccuracies that may occur. The writers of this publication can be reached for questions or comments on content at: AeA Research Department 601 Pennsylvania Avenue, NW North Building, Suite 600 Washington, DC 20004 by voice at: 202.682.9110 by fax at: 202.682.9111 or e-mail at: [email protected] WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association
- 3. FOREWORD Two years ago,AeA released Losing the Competitive Advantage?: The Challenge for Science and Technology in the United States. That report focused on the analysis of a growing problem: that although the United States still led the world in science, technology, and innovation, it was at risk of squandering this preeminence as countries across the globe became more competitive and as we ignored the factors that got us here in the first place. Today we release a new and expanded edition of that report, shifting emphasis more towards recommendations for action, with updated data and analysis providing the context. We release this new report because over the last two years, on the one hand, so much has changed. But on the other hand, unfortunately, so little has changed. Without a doubt, awareness of the issue has intensified. In April 2005, New York Times columnist Thomas Friedman published his bestselling book The World Is Flat, warning Americans that they cannot remain compla- cent as much of the rest of the world vigorously enters and competes in the global economy. In August 2005, the National Academies released Rising Above the Gathering Storm, a report that offered detailed recommendations on how to address these challenges. While the original AeA report was credited with waking up many policymak- ers to the nature of this problem, the National Academies’ report told them exactly what to do about it. Since that time, then House Minority Leader and current Speaker Nancy Pelosi released the Democrats’ Innovation Agenda. House Republicans convened a National Summit on Competitiveness. And President Bush announced his American Competitiveness Initiative in the 2006 State of the Union Address. In fact, the President and the Speaker seem very much on the same page regarding competitiveness. Their plans differ only in the details, not in the direction. Numerous bills were introduced in the 109th Congress in the House and Senate. They all called for the same sensible measures: increasing investment in research and development (R&D); educating more Americans in science, technology, engineering, and math (STEM) and improving the teaching of these subjects; and welcoming the world’s best and brightest to come to the United States to study, work, create companies and high-paying jobs, and spawn innovation. Yes, much has changed in the last two years. America’s political leaders have become aware that more and more countries, companies, universities, and individuals around the world are trying to out-compete us. And yet, we have not moved forward. Not one of these bills was passed or ever seriously debated. This is tragic because, as the data in this report will show, the underlying problems and challenges have only intensified. Our kids’ math and science proficiency remains unacceptable. Too few of them pursue STEM careers to support a knowledge- based economy. The world’s best and brightest continue to face barriers coming to the United States and instead pursue opportunities abroad. Some of the most leading edge R&D is moving offshore. Two years ago, AeA called the United States the proverbial frog in the pot of water, oblivious to the slowly rising temperature of a world catching up to us. Today, the heat is still rising and we are still in the pot. There is hope that we are finally feeling the heat and are poised to do something about it. Hope, but not certainty. AeA hopes that this report provides an urgency for doing something now. We call on Democratic and Republican legislators, as well as the Bush Administration, to act in the 110th Congress on what was essentially agreed on but did not pass in the 109th: comprehensive legislation to advance American competitiveness in a global economy. Timothy E. Guertin William T. Archey Chairman of the Board, AeA President and CEO, AeA WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 1
- 4. TESTIMONIALS FROM THEHIGH-TECH INDUSTRY “We need to be eliminating barriers to finding and developing talented employees --- if you do this one thing we can figure out how to work around all the other system failures that stifle growth and the improvement of the human condition across our nation.” Bruce VV. BBallengee Partner Pariveda Solutions Dallas, Texas “China and India have more honor students than the U.S. has kids – they are not catching up, they have passed us. Improving K-12 math and science education is the solution to most competitive issues. Why? Because appropriate education equates to appropriate 21st century skills which equates to good paying jobs; China and India understand this, we don’t. We must immediately and appropriately train and educate our 4th to 8th grade math and science teach- ers so they can start preparing America’s digital kids for an increasingly flat world.” Randolph EE. GGunter, PPh.D. President 21 Century Learning Solutions, Inc. Orlando, Florida “While U.S. government investment in long-term basic research continues to shrink, other nations are increasing their investments, which support foreign-based competitors. Many of our company's current medical devices were based on fundamental research funded in part by the military and the National Cancer Institute a decade ago. Investments in scientific research today will be the foundations of America's competitiveness and military readiness tomorrow.” Timothy EE. GGuertin President, CEO, and Director Varian Medical Systems, Inc. Palo Alto, California “What is most disturbing to me is that for many of the world’s brightest minds, America is no longer their dream --- they have given up trying to immigrate here. We recently hired a foreign national who has given us the opportunity to export millions of dollars in software to companies around the world, yet he had to fight to stay here. It is bewildering that we have to plea with legislators to get them to understand what their policies are doing to our economy.” Charlie SSundling Chairman and CEO Pipeline Group, Inc. Santa Ana, California “A few years back, we were getting hammered by the low pricing from Indian-based IT firms. So we acquired a small Indian-based company to augment our U.S.-based operations. As a result, our business has grown year over year by 30 percent. Over three years, we have nearly doubled our U.S. and Indian workforce to 1000+. We are now profitable and able to offer better benefits and career growth opportunities to our workers, while continuing to offer superior service to our customers. More jobs, greater success, stability, and growth. Here’s a case where offshore outsourcing has been good for America, its workers, and its American customers.” Peter JJ. BBoni Chairman Alliance Consulting Group Conshohoken, Pennsylvania WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 2
- 5. TABLE OF CONTENTS Foreword1 Testimonials ffrom tthe HHigh-TTech IIndustry 2 Table oof CContents 3 Highlights ffrom tthe LLast TTwo YYears 4 Executive SSummary 5 AeA’s RRecommendations ffor IImproving AAmerican 6 Competitiveness The NNational AAcademies’ RRecommendations ffor IImproving 7 American CCompetitiveness Introduction tto tthe UUpdated DData aand AAnalysis 8 The UUnited SStates FFaces HHeightened CCompetition aas OOther 9 Countries AAre CCatching UUp Ireland iin 22007 10 India iin 22007 10 China iin 22007 12 Russia iin 22007 14 Eastern EEurope iin 22007 14 Waning CCommitments tto RResearch aand DDevelopment 17 Are TThreatening FFuture AAmerican IInnovation The UU.S. WWorkforce IIs IIncreasingly UUnprepared ffor tthe 20 21st Century KKnowledge EEconomy Conclusion 26 Citations 27 More TTestimonials ffrom tthe HHigh-TTech IIndustry 28 WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 3
- 6. February 22005 OnFebruary 14, AeA releases its report, Losing the Competitive Advantage?: The Challenge for Science and Technology in the United States. AeA President and CEO Bill Archey briefs Rep. Anna Eshoo (D-CA) of Silicon Valley. At Rep. Eshoo’s request, Archey briefs Rep. George Miller (D-CA), Chairman of the House Democratic Policy Committee. March 22005 AeA briefs the California Democratic House delegation including then Minority Leader Nancy Pelosi, at the request of Reps. Miller and Eshoo. Over the next year, AeA briefs over 80 Members of the House and Senate, the National Science Board, the National Institute of Standards and Technology, the Defense Science Board, the Government Accountability Office, the House Committee on Education and the Workforce, and the Secretary of Education. April 22005 Thomas Friedman, columnist for the New York Times, publishes his book The World Is Flat. May 22005 Bill Archey briefs industry leaders on competitiveness at the University of California, Irvine’s chancellor’s retreat. Chancellor Ralph Cicerone later becomes President of the National Academy of Sciences. Rep. Sherwood Boehlert (R-NY), then Chairman of the House Science Committee, and Rep. Frank Wolf (R-NY), then Chairman of the House Appropriations Subcommittee for Science, ask AeA to co-sponsor the Republican’s National Summit on Competitiveness, to be held in December 2005. June 22005 Anne M. Mulcahy, Chairman and CEO of Xerox Corporation, gives a major competitiveness address at the annual AeA High Tech Government Dinner in Washington, DC. AeA launches its Competitiveness Series, which to date has produced 13 reports that analyze timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. August 22005 The National Academies release their report Rising Above the Gathering Storm, outlining a detailed set of recommendations for confronting the United States’ competitiveness challenges. September 22005 House Democrats hold their first field hearing on competitiveness at Stanford University with AeA’s Bill Archey, 19 CEOs of high-tech companies, and four university presidents and chancellors present. Rep. George Miller acknowledges that the AeA report “was the catalyst that woke up those of us in the public policy sphere to the competitiveness challenges facing America.” November 22005 Then House Minority Leader Nancy Pelosi and other Democratic leaders release The Innovation Agenda: A Commitment to Competitiveness To Keep America #1 at the National Press Club in Washington, DC. Leader Pelosi later noted publicly that AeA provided the intellectual basis for the initiative. December 22005 AeA co-sponsors the Republican National Summit on Competitiveness at the U.S. Department of Commerce. Panelists include industry executives, university heads, and association leaders. January 22006 Senators Pete Domenici (R-NM), Jeff Bingaman (D-NM), Lamar Alexander (R-TN), and Barbara Mikulski (D-MD) introduce three bills entitled Protecting America’s Competitive Edge (PACE). Despite having around 30 co-sponsors from each party, the bills do not come up for a vote. After a series of briefings between the White House and industry, including AeA, President Bush announces his American Competitiveness Initiative in the State of the Union address. February 22006 AeA launches a series of regional summits on competitiveness through its nationwide network of offices, bringing together leaders of business, academia, local government, parents groups, and the media. November 22006 In her first public appearance off Capitol Hill since the election, then Speaker Elect Nancy Pelosi, accom- panied by Reps. George Miller and Anna Eshoo, comes to the AeA headquarters in Washington, DC to brief nearly 100 high-tech executives on the prospects for passing competitiveness legislation in the new Congress and to thank AeA for its integral role in shaping their Innovation Agenda. HIGHLIGHTS FROM THE LAST TWO YEARS WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 4
- 7. EXECUTIVE SUMMARY We AreStill Losing the Competitive Advantage is the natural sequel to the report AeA released two years ago that explored the challenges the United States faced and, in many ways, was ignoring at its peril. Our purpose then was to alert audiences that America’s edge in science and technology was increasingly at risk. Two years later, we have in large part succeeded. Awareness of this problem among policymakers, the media, and the American people has grown. Reports have been issued, editorials written, initiatives and legislation introduced. Yet despite tthis, llawmakers hhave nnot mmoved fforward wwith aa ccomprehensive ccompetitiveness aand iinnovation aagenda. Now is the time for action. In uupdating tthe ddata ffrom oour pprevious rreport, wwe ffound tthat tthe ccompetitiveness cchallenges confronting tthe UUnited SStates hhave iintensified. This new report includes expanded analysis sections (pages 8-26) with the latest data and updated country case studies to provide the context for assessing our recommendations for action. We provide a timeline of what has happened in the last two years to move this debate forward (page 4). And, to truly bring home the point that competitiveness is not just an academic debate taking place inside the beltway, we iinclude testimonials ffrom hhigh-ttech eexecutives ffrom ccompanies oof aall ssizes aaround tthe ccountry, iillustrating tthe cchallenges tthey confront eevery dday iin aan iincreasingly ccompetitive gglobal mmarketplace ((pages 22 aand 228). We said it two years ago and it remains valid today --- in a rapidly changing global economy, the United States must address the implications of the following critical issues to prevent a slide in global competitiveness: The UUnited SStates FFaces HHeightened CCompetition aas OOther CCountries AAre CCatching UUp Two years later, the intensity of global competition continues to grow. As our case studies show, countries around the world are moving beyond economic reforms to invest in the factors that spawn innovation and propel nations to become global competitors (pages 10, 12, and 14). While this is a net plus for the world, it is only a net plus for the United States if we maintain our competitiveness. But we are not. For eexample, SSouth KKorea hhas ppassed tthe UUnited SStates iin eengineering bbach- elors ddegrees aawarded ((page 111). AAnd wwe hhave sslipped ffrom 111th to 116th internationally iin bbroadband ddiffusion ((page 115). Waning CCommitments tto RResearch aand DDevelopment AAre TThreatening FFuture AAmerican IInnovation Two years later, the good news is that Congress and the President have increased funding for R&D, particularly basic research. The problem is that these investments remain below their peak of the 1980s as a percentage of the economy (page 18). Furthermore, tthe UU.S. RR&D TTax CCredit, wwhich hhas ssupported sso mmuch RR&D iin tthe pprivate ssector, rremains ttempo- rary, iis ssubject tto pperiodic eexpiration, aand nnow iis rranked oonly tthe 117th most ccompetitive ccredit iin tthe wworld ((page 119). The UU.S. WWorkforce IIs IIncreasingly UUnprepared ffor tthe 221st CCentury KKnowledge EEconomy Two years later, American kids’ math and science proficiency remains unacceptably low. While 4th and 8th graders have improved somewhat, our high school students continue to slide (page 21). This means too few are prepared to pursue technical careers. Thousands oof ttechnology jjobs ccontinue tto ggo uunfilled bbecause nnot eenough AAmericans ppossess tthe requisite sskills. And on top of this, the United States continues to close our workforce safety valve: highly skilled and educated foreign nationals (page 23-24). These bbest aand bbrightest ddo nnot ccome hhere aand ttake AAmerican jjobs; tthey ccreate literally tthousands oof jjobs bby ddeveloping iintellectual pproperty, sspawning iinnovation, aand ffounding ccompanies. AeA outlines two tiers of recommendations (page 6) The first tier includes immediate changes that have already been introduced in various bills. The second tier recommendations must become part of the framework of ongoing public policy. 1st TIER RECOMMENDATIONS Champion Dramatic Improvements in the U.S. Educational System Support and Increase Research and Development (R&D) Enact High-Skilled Visa Reform 2nd TIER RECOMMENDATIONS Create a More Business Friendly Environment in the United States Engage Proactively in the Global Trade System Promote Broadband Diffusion Additionally, when it comes to specific details of these recommendations, AeA wholeheartedly endorses the recommen- dations outlined in the National Academies’ report Rising Above the Gathering Storm (page 7). WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 5
- 8. AeA’s RECOMMENDATIONS FORIMPROVING AMERICAN COMPETITIVENESS To maintain our competitive edge, Americans need to realize that the race we are in is much more a marathon than a sprint. AAddvvaanncciinngg UU..SS.. ccoommppeettiittiivveenneessss rreeqquuiirreess mmoorree tthhaann jjuusstt ppaassssiinngg aa ffeeww bbiillllss aanndd aapppprroopprriiaattiinngg ffuunnddss.. TThheessee aaccttiioonnss aarree nneecceessssaarryy,, bbuutt nnoott ssuuffffiicciieenntt.. TThhiiss iiss nnoott aa oonnee-ttiimmee ffiixx,, bbuutt aann oonnggooiinngg pprroocceessss,, aa nneeww wwaayy ooff tthhiinnkkiinngg tthhaatt rreeccooggnniizzeess aanndd aaddaappttss ttoo tthhee cchhaannggiinngg wwoorrlldd.. AeA’s recommendations are divided into two tiers. The first tier includes immediate changes that have been introduced in various bills that garner widespread bipartisan support. The second tier recommendations must become part of the framework of ongoing public policy. The second tier issues are more challenging, they have generally not been intro- duced as legislation, they garner less bipartisan consensus, and they require thoughtful deliberation to achieve work- able public policy. But make no mistake; they are equally critical to long-term American competitiveness. 1st TIER RECOMMENDATIONS CHAMPION DRAMATIC IMPROVEMENTS IN THE U.S. EDUCATIONAL SYSTEM Improve K-12 Math and Science Instruction To Prepare the U.S. Workforce for a 21st Century Knowledge Economy Sustain, Strengthen, and Reauthorize the No Child Left Behind Act Promote Undergraduate and Graduate Science, Technology, Engineering, & Mathematics (STEM) Education Create the Human Capital Investment Tax Credit To Promote Continuous Education SUPPORT AND INCREASE RESEARCH AND DEVELOPMENT (R&D) Increase Federal Funding for Basic Research, Specifically for Physical Science, Engineering, Math, and Computer Science Research within the National Science Foundation, the National Institute of Standards and Technology, the Department of Energy, and the Department of Defense Strengthen the R&D Tax Credit and Make It Permanent ENACT HIGH-SKILLED VISA REFORM Lower Barriers for High-Skilled Individuals To Receive Temporary Work Visas Give Green Cards to All U.S. Educated Master and Doctoral Students 2nd TIER RECOMMENDATIONS CREATE A MORE BUSINESS FRIENDLY ENVIROMNMENT IN THE UNITED STATES Either Through Regulatory or Legislative Action, Reduce the Onerous and Disproportionate Business Tax Levied on Small- and Medium-Sized Companies by Sarbanes-Oxley Section 404 Compliance Start To Address the Rising Costs of Health Care for U.S. Business by Enacting Legislation To Spur the Deployment of Health IT Initiatives Such as Electronic Medical Records; These Initiatives Constitute a Significant First Step In Helping To Reduce Costs, Improve Quality, and Save Lives Fully Fund the U.S. Patent and Trademark Office To Help Reduce Lag Times Between Patent Filing and Approval ENGAGE PROACTIVELY IN THE GLOBAL TRADE SYSTEM Advance Free and Fair Trade Policies and Agreements and Conclude the Doha Round of Global Trade Talks Renew the President’s Trade Promotion Authority Promote Stronger Enforcement of Intellectual Property Protection Worldwide PROMOTE BROADBAND DIFFUSION Provide Industry the Incentives Necessary To Promote Broadband Diffusion Ensure Access to Affordable Broadband for Every American within Five Years ~ RECOMMENDATIONS ~ WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 6
- 9. THE NATIONAL ACADEMIES’RECOMMENDATIONS FOR IMPROVING AMERICAN COMPETITIVENESS When addressing the United States’ competitiveness challenge, policymakers can consider any number of bold and visionary ideas. We at AeA believe the most comprehensive, specific, and workable recommendations to date came from the National Academies’ Rising Above the Gathering Storm report of August 2005. Since that time, much of the legislation introduced to address competitiveness in both the House and Senate has been based directly --- often word for word --- on these recommendation. SSiimmppllyy ppuutt,, AAeeAA eennddoorrsseess tthhee NNaattiioonnaall AAccaaddeemmiieess’’ ffiinnddiinnggss aanndd ssuuppppoorrttss lleeggiissllaattiioonn tthhaatt aaddddrreesssseess tthhee ffoolllloowwiinngg rreeccoommmmeennddaattiioonnss iinn ppaarrttiiccuullaarr.. 10,000 TEACHERS, 10 MILLION MINDS, AND K-12 SCIENCE & MATH EDUCATION Increase America’s talent pool by vastly improving K-12 science and math education Annually recruit 10,000 science and math teachers by awarding 4-year scholarships Strengthen the skills of 250,000 teachers through training and education programs at summer institutes, in Master’s programs, and Advanced Placement (AP) and International Baccalaureate (IB) training programs Increase the number of students who take AP and IB science and math courses SOWING THE SEEDS THROUGH SCIENCE, ENGINEERING, & RESEARCH Sustain and strengthen the nation’s traditional commitment to the long-term basic research that has the potential to be transformational to maintain the flow of new ideas that fuel the economy, provide security, and enhance the quality of life Increase our investment in long-term basic research by 10 percent annually over the next 7 years, with special emphasis on the physical sciences, engineering, math, information sciences, and basic research conducted by the Department of Defense (DOD) Establish a program to provide 200 new research grants each year at $500,000 each, payable over 5 years, to support the work of outstanding early-career researchers; The grants would be funded by federal agencies (NIH, NSF, DOD, DOE, and NASA) to underwrite new research opportunities at universities and government laboratories Establish a National Coordination Office for Research Infrastructure to manage a fund of $500 million per year over the next 5 years for construction of research facilities; Universities and the government’s national laborato- ries would compete annually for the funds Set aside at least eight percent of the budgets of federal research agencies for discretionary funding to catalyze high-risk, high-payoff research Create a DARPA-like organization within the Department of Energy (DOE) called the Advanced Research Projects Agency-Energy (ARPA-E) Institute a Presidential Innovation Award to stimulate scientific and engineering advances in the national interest BEST AND BRIGHTEST IN SCIENCE & ENGINEERING HIGHER EDUCATION Make the United States the most attractive setting in which to study and perform research, so that we can develop, recruit, and retain the best and brightest students, scientists, and engineers from within the United States and throughout the world Provide 25,000 new 4-year sciences, competitive undergraduate scholarships each year to U.S. citizens attending U.S. institutions Federally fund Graduate Scholar or Awards in Science, Technology, Engineering, or Math, a new scholarship program that would provide 5,000 new portable 3-year competitively awarded graduate fellowships each year Provide tax credits up to $500 million each year-to employers who help employees pursue continuing education Revise policies and procedures for granting visas, implement a new skill-based preferential immigration option, increase the permissible time for Ph.D. graduates to obtain employment, provide appropriate access to technical information and equipment, and fund graduate education and research for outstanding foreign nationals ~ RECOMMENDATIONS ~ WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 7
- 10. INTRODUCTION TO THEUPDATED DATA AND ANALYSIS From the assembly line and airplane to the personal computer and Internet, many of the innovations that trans- formed the world in the twentieth century were born in the United States. The dynamic and entrepreneurial compo- sition of the U.S. economy encouraged capital, labor, and creativity to flow efficiently to their most productive use. While many other countries insulated themselves from the global economy, the United States welcomed foreign direct investment, foreign students and workers, and competition onto its shores. Following World War II, the majority of foreign governments supported uncompetitive industries, often attempting to manipulate the creation and direction of production. Meanwhile, the United States allowed for a flexible econ- omy. It concentrated support on the factors of innovation by investing in a knowledge-based economy, funding research and development and scientific education. The United States wisely has held on to many of the principles that created this success. The U.S. economy remains profoundly adaptive to change, and its flexibility in labor and capital markets is second to none. It continues to breed an entrepreneurial culture that the rest of the world envies and often tries to emulate. The United States boasts a vibrant venture capital market with investors who are willing to support visionary, yet risky ideas and who play an active role through hands-on involvement. Not all ventures succeed, but that is the point; innovation flourishes best when people are allowed to fail. The ideas that do make it to the marketplace often produce benefits that far exceed their creator’s intent. The technological revolution of the 1990s created high-paying jobs, new products and services, new companies, and entirely new industries never dreamed of decades earlier. This directly resulted from the commitment by both the public and private sector to invest in new ideas, which helped make the United States the breeding ground for many of the scientific innovations of the twentieth century. But that was yesterday. As the United States takes its leadership for granted, countries around the world have caught on and are catching up. While we begin to close our doors to the best and brightest minds, these talented individuals and the intellectual property and jobs they create here are lured elsewhere. As we cut funding for research and development (R&D) --- a critical factor in the innovation that has driven our economy for a century --- other countries are investing in R&D, scientific education, and high-technology infrastructure. While we continue to believe know-how and ingenuity are exclusive American brands, dozens of emerging nations are restructuring their economies and challenging our superiority. Americans may be surprised if the next revolutionary technology is produced abroad, but we should not be. When one of America’s strongest competitive advantages in the global marketplace is a knowledge-based econ- omy, it does not bode well for the future when the United States neglects the infrastructure that supports its wealth creation. The irony is that the United States already has proven it can compete, but often needs fear to motivate it. In the 1950s, the Soviet Union challenged American leadership in technology by launching the world’s first satellite, Sputnik. Americans feared the Soviets would use this space technology as a weapon. The United States met this challenge by launching a national program to improve math and science education, ultimately winning the space and technology race. In the late 1980s and early 1990s, fear abounded that Japan would become the world’s dominant economy. U.S. businesses responded to the challenge by refocusing their efforts, adopting new technology, and innovating their products and processes. But today it is not just one country. It is a change in the way many countries are structuring their economies. America can certainly compete. It has the flexibility, pioneering spirit, and capital to win the race; but to do this America needs to recognize that future innovation is not predetermined to occur in the United States. Even if we were doing everything right, we still face unprecedented competition from abroad. Rather than face the new global economy unprepared, America needs to confront this competition head-on by supporting the innovation infrastruc- ture. If we don’t, America faces not just a continuing erosion of its manufacturing base, but also its lead in knowl- edge-based industries. WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 8
- 11. For nearly fivedecades following the Second World War, more than half of the world’s population lived and worked outside of the free market system. The Soviet Union and Eastern Bloc, China, India, and much of Latin America and Africa either eschewed capitalism entirely or flirted with socialist policies that stifled competition and rejected global integration. By the close of the twentieth century, all that had changed drastically. The end of the Cold War trans- formed more than just the Soviet Union and Eastern Bloc countries. It attacked the legitimacy of command and control economies everywhere and promoted the benefits of the free market system. China, India, Eastern Europe, the Asian Tigers, and other so-called emerging economies have all learned that the road to economic prosperity, wealth creation, and social development is through the free market. Russia and much of Latin America and Africa have started down the road towards adopting free market systems, although not all are entirely convinced of the benefits of capitalism. Their economies fluctuate toward or away from free market principles depending on which interests control public policy. The United States had long urged the rest of the world to embrace free market principles, preaching the benefits of transparency, competition, foreign investment, economic flexibility, and technological innovation. As political barri- ers fell and countries undertook economic reform, the global marketplace began to become truly global. The good news for U.S. business is that many countries finally listened to American calls for economic liberal- ization. NNoo ccoouunnttrryy hhaass bbeenneeffiitteedd mmoorree ffrroomm gglloobbaall- iizzaattiioonn tthhaann tthhee UUnniitteedd SSttaatteess.. Economic forces have compelled other countries to open their markets, slash tariffs, accept foreign direct investment, buy U.S. prod- ucts, and adopt U.S. technology. However, the poten- tially alarming news for the United States is, again, that many countries listened. Globalization also presents unprecedented challenges to American preeminence. As global economic cooperation proliferates, so too does global competitiveness. CCoouunnttrriieess tthhaatt hhaavvee eenntteerreedd tthhee ffrreeee mmaarrkkeett ssyysstteemm nnooww aaggggrreessssiivveellyy ccoommppeettee aaggaaiinnsstt tthhee UUnniitteedd SSttaatteess.. Leaders in these countries also learned that competi- tion and innovation go hand in hand. By liberalizing their markets, they recognized that to remain truly competitive they also must invest in the innovation infrastructure. These countries now produce talented, highly educated workers and cutting-edge companies, and they realize that technological development is a virtuous cycle. The more a country opens its economy, the more it adopts innovative products and services. With technology adoption, comes development. The more development it spawns, the more robust and competitive its industries become. Capital is drawn in. Intellectual property is created. Innovation takes hold. New products and services are conceived. Wages and living standards rise. Other countries are taking advantage of this formula to advance their own societies and provide opportunities for their domestic companies to compete globally. Indian software programmers, Chinese components manufacturers, Taiwanese consumer electronics makers, and South Korean online game developers have all reaped the benefits of an active national government investing in the innovation infrastructure. In development circles, this is called “leapfrogging.” Most of the industrialized world needed nearly a century to provide 90 percent of its population with telephone service, mainly via copper lines to house- holds. Many developing countries are accomplishing this in a fraction of the time and cost because advanced wireless and satellite technologies allow nations to leapfrog over yesterday’s technology by utilizing the latest innovations. The implications are far WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 9 COUNTRIES THAT HISTORICALLY HAVE BEEN TECHNOLOGICAL FOLLOWERS ARE NOW BECOMING LEADERS. CHINA NOW GRADUATES NEARLY SIX TIMES AS MANY ENGI- NEERS AS THE UNITED STATES, THE EUROPEAN UNION GRAD- UATES THREE TIMES AS MANY, AND SOUTH KOREA --- WITH 1/6TH OF OUR POPULATION --- GRADUATES SLIGHTLY MORE THAN THE UNITED STATES. U.S. DOMINANCE IN AWARDING SCIENCE AND ENGINEERING DOCTORAL DEGREES, TECHNOLOGY PATENTS, AND PATENT CITATIONS IS SLIPPING. EMERGING ECONOMIES ARE FINDING THEY DO NOT HAVE TO BE THE INITIAL INVENTOR OF A TECHNOLOGY TO TAKE ADVANTAGE OF IT. THEY ARE LEVERAGING THE RAPID DIFFU- SION OF ADVANCED TECHNOLOGIES TO PROMOTE INNOVA- TION AND ECONOMIC COMPETITIVENESS. THE UNITED STATES FACES HEIGHTENED COMPETITION AS OTHER COUNTRIES ARE CATCHING UP
- 12. IInnddiiaa iinn 22000077 AnIndian politician once asked Indira Gandhi: “Can the prime minister explain why Indians seem to thrive economically under every government in the world except hers?”4 Prior to the 1980s and 1990s, India pursued socialist policies that discouraged foreign investment, stifled competition, and launched a mass exodus of its brightest citizens seeking opportunity abroad. India has since reversed course by opening much of its economy, reducing burdensome regulation that hindered business development, and investing in the factors of innovation. The once infamous “Permit Raj” that entangled companies in bureaucracy is long gone. Tariffs that were once over 100 percent have plum- meted and inbound trade has skyrocketed. The Indian Institutes of Technology are world renowned. All of this has made India a world class high-technology hub. India boasts a number of companies that are globally competitive, including Infosys, Tata, and Wipro. These companies have gone beyond low value-added software coding to create high value-added products and services. They also realize their low cost of labor advantage is fleeting; Indian wage levels for the highly skilled are rising quickly, allowing other emerging countries to seize the cost advantage. Indian companies will have to compete based on their talent and innovation. India is embarking on further reform to provide labor flexibility, freer flows of capital, and desperately needed infrastructure improvements. Public-private partnerships have created cutting-edge technology parks and R&D facilities in places like Bangalore. These have attracted enormous investments from Cisco, IBM, Intel, Microsoft, and countless other multinational high-tech companies. The highly skilled, Indian-born talent that once flocked to the United States is now returning home to work in these industries, furthering America’s brain drain and enhancing India’s brain gain. WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 10 IIrreellaanndd iinn 22000077 American humorist Dave Barry once called Ireland a medium-sized rural island slowly but steadily being consumed by sheep.1 He could not have been more wrong. Ireland’s rich pastoral landscapes belie the fact that it has become one of the most technologically advanced countries in Europe, generating an innovative high-tech economy that its neighbors are desperately trying to emulate. Throughout the 1980s, Ireland was considered one of the economic dogs of Europe. Since then, the Emerald Isle has transformed itself. In 1987, Ireland’s per capita GDP stood at 69 percent of the European Union average; in 2003, it reached 136 percent. Over that same period of time, unemployment fell from 17 percent to four percent.2 Many economists credit this miracle to the lavish subsidies that flowed into Ireland following its acceptance into the European Union. But this tells only part of the story. Since the 1960s, Ireland has invested heavily in secondary and higher education. This has produced a highly educated population and world class research universities. The Science Foundation Ireland uses public funds to attract top international scientists and researchers. The Foundation has also been highly successful at connecting business with academia and attracting foreign direct investment (FDI). Ireland receives a quarter of all U.S. FDI in Europe, concentrated in high value-added industries like information technology. Ireland manufactures one-third of all computers sold in Europe and is one of the largest software exporters in the world.3 For the first time in a century and a half, talented Irish expatriots and others of Irish decent are return- ing to the homeland in droves. As economic growth and opportunity soar, it should be no surprise that Ireland is now known as the “Celtic Tiger.”
- 13. reaching for Americancompetitiveness; the stagnant economy of yesterday can become the competitive rival of tomorrow. Emerging countries are churning out more scientists, engineers, and technology workers to staff these nascent industries, while the numbers of American students entering these fields has remained flat. Federally funded research and development (R&D) remains below its peak of the 1980s, while foreign governments are creating public- private partnerships to invest in R&D projects and persuade their brightest youth to pursue careers in high tech. U.S. policymakers, the media, and the general public often underestimate or misunderstand the emerging compet- itive threat of nations like China and India. They believe U.S. companies flock to these destinations solely to exploit cheap labor. While this is a factor, it over- looks an additional fact; these and other countries increasingly offer skilled, educated, professional knowl- edge-based workers as well. One needs to remember that the offshore outsourcing of software jobs did not begin because of the price of labor, but because of the drastic need for program- mers to fix the Y2K problem in the late 1990s. The tight deadline involved and the lack of U.S. program- mers forced companies to seek out all available skilled workers, wherever they could be found. AAnndd,, wwhhiillee tthhee ccuurrrreenntt wwaaggee ggaapp bbeettwweeeenn aa UU..SS.. eennggiinneeeerr aanndd aa CChhiinneessee oorr IInnddiiaann eennggiinneeeerr mmaakkeess tthheessee ddeevveellooppiinngg ccoouunnttrriieess aattttrraaccttiivvee,, tthhiiss wwaaggee ddiiffffeerreennttiiaall iiss nnaarrrroowwiinngg,, aanndd sskkiillll sseettss wwiillll bbeeccoommee tthhee ddeetteerrmmiinniinngg ffaaccttoorr.. America can no longer rest on its laurels. The follow- ing statistics and anecdotes offer sobering evidence of the urgency with which U.S. policymakers must act. OTHER COUNTRIES ARE PLACING A GREATER EMPHASIS ON EDUCATING SCIENCE AND TECHNOLOGY WORKERS The United States trails other countries in the number of people graduating with bachelor degrees in engineering. While the United States is the largest economy in the world and the third most populous nation, it only ranks seventh in the number of bachelor degrees awarded in engi- neering. China graduates almost six times as many engineers as the United States, according to the most reliable data available. Japan, with less than half the population of the United States, grad- uates 60 percent more engineers. SSoouutthh KKoorreeaa --- wwiitthh 11//66th tthhee ppooppuullaattiioonn aanndd 11//1122th tthhee GGDDPP --- ggrraadduuaatteess sslliigghhttllyy mmoorree eennggiinneeeerrss tthhaann tthhee UUnniitteedd SSttaatteess..5 Some U.S. executives have argued that engineers educated in Chinese universities, in many cases, are not of the same caliber as American or European educated work- ers. But as China sharply increases investment in its technical education system, the gap is closing, and closing fast. On a country-by-country basis, the United States still leads in the number of science and engi- neering (S&E) doctoral degrees granted by a wide margin. But significant portions of these are awarded to foreign nationals who increasingly cannot or choose not to stay in the United States after graduation. Between 2001 and 2005, U.S. S&E doctorates awarded to foreign nationals increased by 25 percent and comprised nearly all of the overall growth in S&E doctorates awarded over this time period.6 When combined, the European Union-25 awards nearly double the number of S&E doctoral degrees as the United States.7 The integration of 10 new countries into the Union has the potential to increase the availability of skilled labor throughout Europe, enhancing the continent’s competitiveness. The number of S&E doctoral degrees awarded in many developed countries is growing faster than in the United States. Between 1993 and 2003, S&E doctoral degrees in Germany grew by 6 percent, in the United Kingdom by 44 percent, and in Japan by 71 percent. In the United States they grew by just one percent.8 Worldwide EEngineering DDegrees AAwarded Most Recent Year Available Number of Percent of Rank Country Bachelor Degrees World 1. China 351,500 28% 2. European Union 198,300 16% 3. Japan 98,400 8% 4. Russia 82,400 7% 5. India 82,100 7% 6. South Korea 64,900 5% 7. United States 60,600 5% 8. Mexico 44,700 4% 9. Taiwan 41,900 3% 10. Brazil 25,300 2% Source: U.S. National Science Foundation WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 11 TThhee iimmpplliiccaattiioonnss aarree ffaarr rreeaacchhiinngg ffoorr AAmmeerriiccaann ccoommppeettiittiivveenneessss;; tthhee ssttaaggnnaanntt eeccoonnoommyy ooff yyeesstteerrddaayy ccaann bbeeccoommee tthhee ccoommppeettiittiivvee rriivvaall ooff ttoommoorrrrooww..
- 14. CChhiinnaa iinn 22000077 Asthe inventor of gunpowder, rocketry, the compass, the printing press, and the mechanical clock, China has long valued innovation. Today China is merging this innovative culture with economic reforms that are open- ing its market to the world, and the world has taken note. China is already the world’s manufacturing hub and is now moving up the value chain with a state sponsored plan to promote higher end technology firms, research universities, and indigenous innovation. China has undergone three decades of economic reforms to become a global competitor. In 1978, it began to eliminate price controls, liberalize capital markets, encourage foreign investment, improve infrastructure, and ultimately raise living standards. In the early 1990s, China focused on utilizing the latest technology to create an integrated, digital economy and adopted proven technology incentives from Silicon Valley, includ- ing stock options and an R&D tax credit. High-tech firms considered to be “of national importance” continue to enjoy lower tax rates than other companies.9 Over the last several years, China’s annual GDP growth has risen between seven and nine percent.10 In 2002, China surpassed the United States as the prime destination for foreign direct investment.11 In 2004, it over- took the United States as Japan’s largest trading partner.12 And by 2020, China’s economy is projected to be the second largest in the world, behind only the United States.13 Multinational companies are flocking to China in droves. They recognize the dual benefits of investing in China: access to low-cost, technically skilled labor and an enormous market of consumers with steadily rising incomes. One would be hard pressed to find any major American or multinational tech company that is not doing business and expanding investment in China. China is admittedly in the early stages of creating indigenous companies that are innovative and globally competitive, but the foundation is being built. In 2004, the little known Chinese company Lenovo bought IBM’s personal computer division, making it the world’s third largest global PC maker. More than a dozen Chinese companies are now in the Fortune 500. China now graduates nearly six times as many engineers as the United States, according to the most reliable data available.14 Increasingly, their technical skills rival those of American and European engineers, though their entrepreneurial skills generally lag their Western counterparts. But China’s native-born expatriot talent is returning home to pursue new business opportunities, and many returnees not only have science and engi- neering skills, but also the management and entrepreneurial experience to create globally competitive compa- nies. They return to a country where wages are rising fast, nearly eight percent in 2006 with similar projec- tions for 2007, and wages in information technology fields growing even faster.15 Returnees will also find a forward thinking national government whose primary concerns of stability and job creation make it willing to spur investment through tax incentives, R&D initiatives, and technology parks. China is pouring investment into its universities to create world class education and research centers. Since 1998, state financing for higher education has more than doubled, reaching $10.4 billion in 2003.16 China had 926,000 researchers in 2004, second only to the United States, and 77 percent more than it had in 1995.17 All of this is mere prologue to a larger, organized effort. Just over a year ago, President Hu Jintao, supported by scientific leaders in the Chinese government, announced a groundbreaking 15 Year Science and Technology Plan. The plan has received very little attention outside of China, but its implications should be sobering to any policymaker in any country that hopes to compete with China in the future. The plan’s ulti- mate goal, backed by aggressive investment in all of the areas discussed above, is to make China a globally preeminent scientific, technological, and economic power, to be less reliant on foreign technology and instead to create “independent, indigenous innovation.” WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 12
- 15. WeAre Still Losingthe CompetitiveAdvantage 2007 American Electronics Association 13 AS OTHER COUNTRIES SHARPEN THEIR FOCUS ON SCIENCE AND TECHNOLOGY, THE UNITED STATES RISKS LOSING ITS DOMINANCE IN THESE FIELDS The ascendancy of science and technology in other countries is also observable through the origin of S&E articles in academic journals. The number of science and engineering articles in the United States grew by 19 percent between 1988 and 2003, while in Western Europe the number of S&E articles leaped by 67 percent, surpassing the United States with 240,900 articles in 2003. In Eastern Europe the number more than tripled. The number of S&E articles in Asia grew by more than one and a half times during this same period, while the number of articles in China increased sixfold, albeit from a small base.18 The dominance of U.S. industry is slipping in the number of patents granted. Prior to 1990, U.S. corporations received 65 percent of all corporate U.S. patents. Since that time, foreign corporations have significantly closed the gap. Between 1990 and 2003, U.S. corporations received 52 percent of all corporate U.S. patents.19 Patents granted by the United States to companies based in France, Germany, Japan, South Korea, Taiwan, and the United Kingdom --- to name a few --- have increased over the past decade. While the United States still leads the world in the number of S&E articles cited (showing the importance of those articles), other countries are increasing their world- wide share. In 1992, the United States accounted for 52 percent of S&E article citations, the EU-15 had 28 percent, and Asia had eight percent. By 2003, the U.S. world share dropped to 42 percent, while the EU-15 grew to 33 percent and Asia grew to 12 percent.20 RAPID TECHNOLOGY DIFFUSION IS ALLOWING OTHER COUNTRIES TO LEAPFROG OLDER TECHNOLOGIES AND CATCH UP TO OR EVEN SURPASS THE UNITED STATES Throughout the twentieth century, the cost of land- based, copper wire phone lines remained prohibitively high for most developing countries, particularly in the hands of inefficient, state-owned monopolies. In the 1980s and 1990s, governments around the world privatized these industries and opened them to compe- tition. TThhiiss lliibbeerraalliizzaattiioonn,, ccoommbbiinneedd wwiitthh tthhee ddeevveelloopp- mmeenntt ooff hhiigghhllyy aaddvvaanncceedd,, lloowweerr ccoosstt tteecchhnnoollooggiieess,, hhaass aalllloowweedd ccoouunnttrriieess ttoo ““lleeaappffrroogg”” ffrroomm eeccoonnoommiicc oobbssccuu- rriittyy iinnttoo tthhee gglloobbaall eeccoonnoommyy.. This is true because technology diffusion is about more than just how many telephones or personal computers a country has. Technology diffusion provides access. It plugs the entire nation into the economy. It connects rural communities to urban centers. It links consumers and producers more efficiently and in ways that were previously unimaginable. DDiiffffuussiioonn pprroommootteess aa mmoorree ssoopphhiissttiiccaatteedd,, wweellll iinnffoorrmmeedd,, ddeemmaanndd ddrriivveenn ssoocciieettyy tthhaatt ppuusshheess ccoommppaanniieess ttoo ccrreeaattee iinnnnoovvaattiivvee pprroodduuccttss,, sseerrvviicceess,, aanndd eennttiirreellyy nneeww iinndduussttrriieess.. It is no coincidence that extensive public investment in the research and development that spawned the computer and Internet revolutions helped diffuse these technologies in the United States. This provided U.S. companies with a head start in developing innovative commercial applications from these technologies. This investment also gave the United States a head start in constructing an elaborate infrastructure to support groundbreaking technology companies. Access to highly skilled labor and university research allowed companies to pursue innovative ideas that otherwise might not have been given a chance. Industry then Science aand EEngineering AArticles by CCountry oor RRegion 1988 - 2003 Percent Country 1988 2003 Change Western Europe 143,900 240,900 67% United States 177,700 211,200 19% Asia 51,800 131,200 153% China 4,600 29,200 532% India 8,900 12,800 44% Eastern Europe 10,000 34,300 244% Source: U.S. National Science Foundation 0 15,000 30,000 United States GermanyUnited Kingdom Japan 20031993 Note: Reliable historical data for countries such as China and India are not available. Source: U.S. National Science Foundation +44% S&E DDoctoral DDegrees AAwarded +6% +1% +71%
- 16. WeAre Still Losingthe CompetitiveAdvantage 2007 American Electronics Association 14 RRuussssiiaa iinn 22000077 In a 2004 campaign speech, Vladimir Putin called the collapse of the Soviet Union a “national tragedy on an enormous scale.” Rhetoric or not, the dismantling of the former U.S.S.R. did little initially to help the average Russian. The 1990s were a nightmare of currency fluctuation, unemployment, unpaid wages, and instability. But the past few years have witnessed steady economic growth --- largely due to rising oil and natural gas prices. And in opposition to the oligarchical 1990s, this growth has slowly benefited the average Russian. Though still modest by Western standards, salaries in Russia have been growing at 10 percent a year and disposable income is rising. Eighty million Russians now have cell phones and one-fifth of all households contain a personal computer.21 Following a 1990s brain drain of epic proportions, the Russian high-tech sector has been growing steadily, mostly in the systems integration and software development sectors. In 2006, the government announced the formation of the Russian Venture Company. Its strategic goal is to attract over $1 billion of investment into the high-tech sector by the end of 2007.22 Tactically, these venture capitalists are luring tech companies and investors by constructing technology parks and offering favorable tax incentives. Hewlett-Packard opened a High Tech Solution Center in Moscow in 2005. Not to be left behind, Intel, Motorola, and Sun Microsystems are expanding software development activities in Russia. Russia is not without its risks. The legal and banking systems pose significant barriers to entry, particularly for start-up firms. Intellectual property protections are weak and piracy is rampant. And clearly, Vladimir Putin intervenes in the free market whenever he sees fit. But he has stabilized the economy and overseen the rise of a vibrant middle class. For the majority of Russians, creating jobs and prosperity is the only practical way to turn around the so-called national tragedy. EEaasstteerrnn EEuurrooppee iinn 22000077 Despite the old Eastern Bloc joke: “Capitalism is man exploiting man; communism is just the opposite,” the former Soviet satellites and the Baltic republics vigorously embraced free markets when the Iron Curtain fell. Many undertook rapid economic reforms termed “shock therapy” that privatized dying industries, promoted investment, and allowed competitive forces to flourish after 50 years of stagnation. These countries now boast steady to accelerated growth, strong foreign direct investment, profitable domestic companies, and member- ship in the European Union and World Trade Organization. Poland, Hungary, and the Czech Republic, in particular, had long generated a highly educated workforce of scientists and engineers even under communist rule. They have now coupled this technical advantage with market reforms and incentives that are attracting foreign investment, particularly from Western Europe, which looks to its eastern European neighbors as a “nearshoring” alternative to China and India. The benefit of nearshoring is finding “countries that are quite cheap and very close rather than very cheap and far away.”23 As Hungary’s Economic Minister put it: “You will find the same cost as Southeast Asia but with the political stability of Western Europe.”24 Even Romania and Bulgaria are challenging other Eastern European nations, creating an intense rivalry as everyone tries to attract foreign investment and technology companies to become their own Silicon Valley East. Finally, enter the Baltic countries: Estonia, Latvia, and Lithuania. Combining many of the same strengths as their neighbors with a business friendly flat tax, the Baltic republics are attractive to foreign investors and conducive to start-up companies. Tallinn, Estonia is home to the innovative company Skype, which makes software that enables free or inexpensive calls over the Internet. Skype’s secret is that none of its technical talent came from Bangalore or Silicon Valley. It was entirely homegrown.25
- 17. developed innovative manufacturingprocesses and supply chain logistics to bring these products to market. As a result, to this day, the majority of leading computer hardware and software firms, as well as most of the largest successful Internet companies, are head- quartered in America. BBuutt oonnee iirroonnyy aabboouutt lleeaaddiinngg eeddggee tteecchhnnoollooggiieess iiss tthhaatt yyoouu ddoo nnoott hhaavvee ttoo bbee tthhee iinniittiiaall iinnvveennttoorr ooff tthhee tteecchh- nnoollooggyy ttoo bbeeccoommee aa wwoorrlldd ccllaassss ccoommppeettiittoorr iinn ddeevveellooppiinngg iittss aapppplliiccaa- ttiioonnss. Emerging countries around the world are catching up to --- and in more and more cases surpassing --- the United States in adopting and diffusing advanced information and communication technologies to spur their economies. Two prime examples are broadband and cellular deployment. As we will illustrate, these technologies are unique because the benefits of their diffusion are synergistic; they extend beyond their most direct appli- cation. By contrast, if a U.S. competitor holds a strate- gic advantage in making plasma screen televisions, this may be a concern, but the effects are limited because it is not a networked technology. When a country builds highways, the economic bene- fits extend far beyond the profits of the company that laid the pavement. Commerce as a whole becomes more efficient. Broadband and cellular networks offer similar cascading benefits as more consumers integrate into the economy and more companies vie to create commercial applications for these networks. Countries around the world have gained competitive advantages through rapid diffusion of broadband and cellular technologies. Governments have supported these efforts as a proven means to foster economic growth and development. Their indigenous companies achieve first mover advantages in commercializing applications from these technologies and reap the benefits as others scramble to catch up. The United States continues to lag many of our economic rivals in broadband diffusion. In 2002, the United States ranked 11th in the world in broadband diffusion; as of 2005 we fell to 16th with 11.4 subscrip- tions per 100 inhabitants, slightly behind Singapore.26 As much as 20 percent of the U.S. population does not even have the option to receive broadband services.27 South Korea leads the world in broadband, with a diffusion rate more than double that of the United States --- 25 subscriptions per 100 inhabitants in 2005.28 Many countries with higher broadband diffusion rates benefit from higher geographic popula- tion densities, facilitating low-cost broadband penetra- tion. But fifth ranked Canada has similar urbanization densities as the United States and boasts over 50 percent higher broad- band diffusion. The United States also lags in broadband speed. Countries like South Korea and Japan not only boast greater diffusion rates; both countries offer services more than 20 times faster than those in the United States.29 And in many cases, multi- ple companies compete to offer services, instead of just one or two as in the United States, creating a dramat- ically more competitive, consumer-driven environment. So South Korea has outpaced the rest of the world in broadband deployment. So what? How could this possibly threaten the United States? South Korea’s rapid adoption of broadband allows it to do more than just brag internationally about having the world’s highest broadband diffusion rate. Government investment in broadband has transformed the domes- tic economy. BBeeccaauussee tthhee mmaajjoorriittyy ooff SSoouutthh KKoorreeaannss aacccceessss tthhee IInntteerrnneett tthhrroouugghh llooww-ccoosstt,, ssuuppeerr hhiigghh-ssppeeeedd ccoonnnneeccttiioonnss,, pprroodduucceerrss aanndd ccoonnssuummeerrss aarree lloocckkeedd iinn aa sseeaammlleessss nneettwwoorrkk tthhaatt pprroommootteess iinnnnoovvaattiioonn.. WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 15 TThhee ppoossssiibbiilliittyy tthhaatt tthhee nneexxtt bbrreeaakktthhrroouugghh tteecchhnnoollooggiieess wwiillll bbee bboorrnn aabbrrooaadd iiss eevveerr mmoorree lliikkeellyy.. 0 5 10 15 20 25 24.9 20.9 19.4 19.3 17.6 17.0 16.3 16.0 15.5 15.1 15.0 14.3 14.1 12.8 11.6 11.416. United States 15. Singapore 14. Finland 13. Japan 12. Israel 11. Norway 10. Sweden 9. Iceland 8. Belgium 7. Taiwan 6. Switzerland 5. Canada 4. Denmark 3. Netherlands 2. Hong Kong 1. South Korea Source: International Telecommunications Union Broadband DDiffusion Subscriptions pper 1100 IInhabitants 2005
- 18. WeAre Still Losingthe CompetitiveAdvantage 2007 American Electronics Association 16 South Koreans of all ages have developed a passion for online games, a service that only truly works over broadband. South Korean companies have used this domestic market as an incubator to further innovate their games and meet the demand for a previ- ously nonexistent service. As a result, South Korean game developers entered the $460 million Chinese online game market and now own a 45 percent market share.30 AAtt tthhee ffoorreeffrroonntt ooff iinnnnoovvaattiioonn,, tthheessee ddeevveelloopp- eerrss hhaavvee ggaaiinneedd ccoommppeettiittiivvee ffiirrsstt mmoovveerr aaddvvaannttaaggeess iinn ttaakkiinngg tthheessee pprroodduuccttss gglloobbaall aass ootthheerr ccoouunnttrriieess ddeeppllooyy bbrrooaaddbbaanndd.. Rapid technology diffusion creates demand for innovative products and services. As with broadband, similar effects can be seen with cellular technology. But in this case, diffusion is less the issue. Cell phones in the United States are, for the most part, affordable and ubiquitous. The question is not how many people own cell phones in a particular country, but how cutting edge is the technology. Despite the fact that much of the R&D that led to breakthroughs in cellular technol- ogy originated in the United States, other countries are now beating us to the punch in deploying the world’s most advanced cellular networks and creating innova- tive products and services to run on them. The most troubling implication of these trends, as with broadband, is that countries that boast the most advanced cellular networks also tend to produce the most globally success- ful cellular technology companies. These industries create innovative products and services, cutting edge companies, and high paying jobs. From Sweden and Finland to South Korea and Japan, globally competitive cellular companies have evolved where development of the industry is strongly supported. As a result, consumers in these countries have been the first to use their cell phones to take pictures. They are now the first to use phones to play music, download multimedia files, and make point-of-sale purchases like a credit card. Where are these services in the United States? Even in Italy, consumers have become sophisti- cated in demanding more than just voice and data capabilities; they demand chat, multimedia messaging, and real-time video streaming of soccer games. To achieve growth in such a saturated market, Italy’s top cellular provider met local demands and aggressively expanded services to customers in South America.31 WHY IS THIS A PROBLEM? As countries catch up to the United States in science and engineering and as they diffuse technology to promote innovation and enhance competitiveness, the possibility that the next breakthrough technologies will be born abroad is ever more likely. The world has become intensely competitive in a very short period of time. According to a 2005 CIA report, by 2020 China is forecast to become the world’s second largest economy. India is predicted to surpass all European countries. Even Brazil and Indonesia are predicted to muscle their way into the world’s top tier economies. The CIA states unequivocally that “the great- est benefits of globalization will accrue to countries and groups that can access and adopt new technologies.”32 When assessing this new reality, we focus on the perva- siveness of change in the global economy. If we hone in on a particular emerging country, it is all too easy to extract a piece of data or find a specific trend to reassure ourselves that we have nothing to fear. We might dismiss China’s ascendancy as being built on an unsustainable political system. We might console ourselves that India will never become a world power as long as vast pockets of its population live in poverty and lack modern infra- structure. Russia, we might argue, is one or two obstruc- tive government interventions away from rejecting free market economics outright. And as for Eastern Europe, South Korea, or any of the other emerging countries? Their economies are miniscule, we might argue. We might. BBuutt tthheessee aarree jjuusstt eexxccuusseess tthhaatt aallllooww uuss ttoo rreemmaaiinn ccoommppllaacceenntt aanndd oovveerr- llooookk tthhee bbiiggggeerr ppiiccttuurree --- aallll ooff tthheessee ccoouunnttrriieess aanndd ddoozzeennss mmoorree aarree mmaakkiinngg uunnpprreecceeddeenntteedd eeffffoorrttss ttoo ccoommppeettee.. Given that reality, U.S. attitudes need to change. We cannot arrogantly assume that innovation is an exclusive American concept. Innovation is earned, not given. To enhance our competitiveness and invest in future innovation, public policy needs to be much more forward looking. In many ways, we are the victims of our own success. Over the last 60 years, we have created conditions that helped spawn innovations in many sectors. But our competitors are now borrowing from this proven blue- print, while the United States is neglecting the factors that got us here. If we remain complacent, we risk losing our technological leadership. TThhee ggrreeaatteesstt bbeenneeffiittss ooff gglloobbaalliizzaattiioonn wwiillll aaccccrruuee ttoo ccoouunnttrriieess tthhaatt aacccceessss aanndd aaddoopptt nneeww tteecchhnnoollooggiieess..
- 19. The United Statesemerged from World War II virtually untouched by the physical destruction that ravaged Europe and Asia, vaulting it to the top of the world’s power structure economically and militarily. Science and innovation proved integral to America’s victory. Penicillin, the proximity fuse, and the atom bomb all played decisive roles in the war. Scientific research enjoyed widespread popular support and prompted the creation of the National Science Foundation (NSF) in 1950. The goal of NSF was “to promote the progress of science; to advance the national health, prosperity, and welfare; to secure the national defense.”33 The NSF, and federally funded research in general, has played a crucial role in the development of the U.S. military and economy. Policymakers of the 1950s and 1960s understood that funding scientific and technological research was an investment in the future and in national security. After the Soviet Union launched Sputnik, this funding became critical in fighting the Cold War. The United States realized that the only way to compete militarily with the Soviets was to enhance our technical capabil- ities and “out innovate” them. This strategy required significant government involvement in funding tech- nologies that would not elicit practical or commercial applications quite possibly for decades. Research and development (R&D) funding is vital in promoting innovation and advancing the technology industry. This, in turn, bolsters the U.S. economy and supports the military. President Reagan recognized this in the 1980s when he significantly increased R&D fund- ing and provided the United States with a bold vision of technological achievement and advancement. Consider what federally funded R&D has given us and understand the time required for just two innovations: fiber optics and the Internet. Federal funding of solid- state physics and ceramics/glass engineering in the late 1960s created the knowledge base that led to wide- spread applications of fiber optic cable in the 1990s. Similarly, the Department of Defense began experi- menting with the design of a decentralized file and data sharing network in 1969. This eventually led to the explosive diffusion of the Internet 25 years later. WWhhiillee ccrriittiiccss ooff ppuubblliiccllyy ffuunnddeedd RR&&DD aarrgguueedd aatt oonnee ttiimmee tthhaatt iitt wwaass ttaannttaammoouunntt ttoo ““ppiicckkiinngg wwiinnnneerrss aanndd lloosseerrss,,”” tthhiiss rreesseeaarrcchh rraarreellyy ffaavvoorrss aa ssppeecciiffiicc aapppplliiccaattiioonn oorr ccoommppaannyy pprrooppoossaall.. IItt ffuunnddss tthhee iiddeeaass aanndd uunneexxpplloorreedd sscciieennttiiffiicc ffiieellddss tthhaatt ggeenneerraattee ssppeecciiffiicc iinnnnoovvaattiioonnss oorr ccoommmmeerrcciiaall aapppplliiccaattiioonnss ffuurrtthheerr ddoowwnn tthhee lliinnee.. No one would argue that federal support for early research on the Internet favored one company over another. This long-term basic research laid the foun- dation upon which the marketplace later decided that, for example, Amazon.com had a sustainable business model while Webvan.com and Pets.com did not. Innovation RResulting ffrom UU.S. Federally FFunded RResearch (A Very Partial List) IInnnnoovvaattiioonn FFuunnddeerr The Internet DARPA/NSF Web Browser NSF Barcodes NSF Fiber Optics NSF Routers NSF MRI Scanners NIH/NSF Doppler Radar NSF Speech Recognition NSF/DARPA Nanotechnology NSF Computer Aided Design NSF/DARPA Global Positioning Satellites DARPA The Mouse DARPA DARPA = Defense Advanced Research Projects Agency NSF = National Science Foundation NIH = National Institutes of Health WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 17 SOME OF THE MOST REVOLUTIONARY INVENTIONS OF THE PAST CENTURY --- THE INTERNET, MRI, GPS, AND THE MOUSE, TO NAME A FEW --- WERE BORN FROM FEDERAL RESEARCH. FEDERAL R&D FUNDING HAS DECLINED OVER THE PAST TWO DECADES. IN 1985, IT REPRESENTED 1.25 PERCENT OF GDP, NEARLY A HALF PERCENTAGE POINT HIGHER THAN IN 2004 WHEN IT REPRESENTED ONLY 0.80 PERCENT. FEDERAL FUNDING PRIORITIES HAVE SHIFTED AWAY FROM TECH- NOLOGY. IN 1982, NEARLY HALF OF FEDERAL R&D WENT TO TECHNOLOGY; BY 2005 THIS DROPPED TO ONE-THIRD. THE U.S. R&D TAX CREDIT HAS SPURRED ENORMOUS AMOUNTS OF R&D IN THE PRIVATE SECTOR; YET IT REMAINS TEMPORARY AND SUBJECT TO EXPIRATION, WHILE COUNTRIES AROUND THE WORLD HAVE ENACTED MORE COMPETITIVE, PERMANENT CREDITS TO LURE R&D TO THEIR SHORES. WANING COMMITMENTS TO RESEARCH & DEVELOPMENT ARE THREATENING FUTURE AMERICAN INNOVATION
- 20. The federal governmentprovides the primary funding mechanism for basic research in the United States. Basic research strengthens the innovative capacity of the private sector by increasing industry’s ability to absorb scientific and technical knowledge and develop applications from it. While basic research plays a vital role in building the foundation of technological advancement, it does not always lead directly to the creation of new products and services. For this reason, industry funded basic research is sporadic. The risk is simply too high that a company will either realize no return on its investment or the return will arrive years or decades later. Even then, the resulting scientific discoveries may help the company’s competitors as much as they help its own bottom line. And the societal benefits of the research may far outweigh any profits to the company. Consequently, government funding of basic research is necessary for our continued technological advancement. Unfortunately, as a percentage of the economy, U.S. federal R&D funding reached its pinnacle in the 1980s and our focus on future technological innovation has been slipping ever since. With the end of the Cold War, federal funding commitments for R&D have declined, especially in engineering and the physical sciences. The good news is, while two years ago Congress and the President cut the NSF budget, the House’s FY 2007 Continuing Resolution and the President’s FY 2008 budget call for dramatic increases in NSF funding for long-term basic research.34 IInnccrreeaassiinngg ffeeddeerraall RR&&DD ssppeennddiinngg iiss ccrruucciiaall ttoo mmaaiinnttaaiinn- iinngg AAmmeerriiccaann ccoommppeettiittiivveenneessss iinn aa gglloobbaall eeccoonnoommyy.. Although the United States remains the world’s R&D leader, we are eating our seed corn. We are not invest- ing in a new foundation of research that will fuel inno- vation 10, 20, or even 40 years from now. FEDERAL R&D FUNDING IS ON THE DECLINE In absolute terms, U.S. federal funding of R&D recently hit its peak. As of 2004, federal spending stood at an all-time high of $86.3 billion, adjusted for inflation. The years that ranked next highest were 2003 when the federal government spent $81.8 billion and 1987 when it spent $80.1 billion.35 But more importantly, as a percentage of the U.S. economy, federal R&D funding has declined over the past two decades. In 1985, federal R&D funding represented 1.25 percent of U.S. GDP, nearly a half percentage point higher than in 2004 when R&D represented only 0.80 percent of GDP.36 FEDERAL R&D PRIORITIES ARE SHIFTING AWAY FROM TECHNOLOGY Federal R&D funding has also shifted away from technology --- defined as engineering, physical sciences, math, and computer science. In 1982, tech- nology R&D represented 48 percent of the federal government’s R&D budget and life sciences repre- sented 36 percent. By 2005, these priorities had switched, with technology R&D at 32 percent of the federal R&D budget and life sciences at 54 percent.37 While supporting research that benefits the physical health of Americans is commendable and should continue, tteecchhnnoollooggyy RR&&DD rreemmaaiinnss vviittaall ttoo tthhee eeccoonnoommiicc hheeaalltthh ooff tthhee nnaattiioonn.. IItt ffoosstteerrss tthhee ccuuttttiinngg eeddggee tteecchhnnoollooggiieess tthhaatt bboollsstteerr tthhee eeccoonnoommiicc aanndd iinndduussttrriiaall ssttrreennggtthh ooff tthhee UUnniitteedd SSttaatteess.. WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 18 0% 0.75% 2004200220001998199619941992199019881986198419821980 1.5% Source: U.S. National Science Foundation Federal FFunding oof RR&D aas aa PPercent oof GGDP 1980 - 22004 1985 = 1.25% 2004 = 0.80% Federal RR&D FFunding bby FField Percent oof TTotal FFunding 1982 - 22005 Note: Technology = engineering, physical science, math, and computer science Source: U.S. National Science Foundation 1982 = 48% 2005 = 54% 2005 = 32% 1982 = 36%
- 21. WeAre Still Losingthe CompetitiveAdvantage 2007 American Electronics Association 19 INDUSTRY FUNDED R&D IS INCREASINGLY AT RISK OF MOVING OVERSEAS While basic research is the purview of the federal government, the expertise of industry lies in taking the scientific discoveries generated from basic research and turning them into innovative products and services. The private sector is more adept at converting basic research into applied research and product develop- ment. BBuutt iinn aa gglloobbaall eeccoonnoommyy tthhee qquueessttiioonn bbeeccoommeess:: wwhheerree wwiillll tthheessee ccoommppaanniieess ddeecciiddee ttoo ddoo tthhiiss?? Since it was first enacted in 1981, the U.S. R&D tax credit has been integral in encouraging industry to conduct R&D in the United States. Unfortunately, the credit has always retained “temporary” status. It has been reauthorized 12 times and has lapsed twice. This uncertainty has constrained the ability of U.S.- based companies to plan for long- term R&D projects. Company budgets cannot properly account for the tax benefit and, as a result, many R&D projects either do not receive adequate funding or they are moved overseas. China’s R&D tax credit is permanent, allowing companies to reduce uncertainty and plan investments far into the future.38 EEvveenn aammoonngg ddeevveellooppeedd ccoouunnttrriieess,, tthhee UUnniitteedd SSttaatteess --- oonnccee tthhee mmoosstt aattttrraaccttiivvee llooccaattiioonn ttoo ppeerrffoorrmm RR&&DD --- iiss nnooww oonnllyy tthhee 1177th mmoosstt ccoommppeettiittiivvee nnaattiioonn iinn tteerrmmss ooff RR&&DD ttaaxx iinncceennttiivveess..39 These benefits are pushing U.S. companies to look abroad to conduct R&D. U.S. affiliates invested $28.8 billion on R&D in foreign countries in 2003, the most recent data avail- able, up 72 percent from 1999.40 The U.S. R&D tax credit expired on December 31, 2005 and remained expired for one year until Congress passed and the President signed it back into law retroactively in December 2006. The good news is that the new credit was strengthened to allow more companies to claim its benefit. The bad news is that Congress again failed to make the credit permanent, extending it only through December 2007. WHY IS THIS A PROBLEM? Research and development provides the seed corn for future innovation. As a nation, we cannot afford to undercut federal funding of basic research or minimize incentives for industry to conduct applied research and development in the United States. GGoovveerrnnmmeenntt iinnvveessttmmeenntt iiss iinnddiiss- ppeennssiibbllee iinn bbuuiillddiinngg tthhee ffoouunnddaattiioonn ooff aa kknnoowwlleeddggee-bbaasseedd eeccoonnoommyy.. IItt iinnvveessttss iinn vveennttuurreess aanndd iiddeeaass yyeeaarrss bbeeffoorree aa ccoommmmeerrcciiaallllyy vviiaabbllee pprroodd- uucctt oorr sseerrvviiccee iiss iimmaaggiinnaabbllee,, lleett aalloonnee mmaarrkkeettaabbllee.. The Department of Defense supported research on the Internet for 25 years before it became commercially viable. The development of Magnetic Resonance Imaging (MRI) was based on 35 years of government funding through the National Institutes of Health. Sixty million patients a year are grateful for such persistence. The U.S. government currently supports research in advanced materials by exploring the structure of matter at the molecular, atomic, and subatomic level. This research provides the foundation for the nascent nanotechnology industry. These discoveries have proved critical in designing everything from cell phones to jet airplanes. It will continue to play a role in creat- ing future innovations that cannot now be imagined. When the federal government provides the foundation and funding for innovation, the U.S. economy benefits as businesses convert these innovations into new prod- ucts, services, and entirely new industries. Why would we want to stifle these advancements? Policymakers need to support and enhance any effort that funds research and development and stimulates it in the private sector because it is one of a small list of government programs that can unequivocally be viewed as an investment. $0 $15 $30 $16.8 $17.5 $17.9 $24.9 $28.8 20032002200120001999 R&D PPerformed AAbroad bby UU.S. CCompanies (in billions of current U.S. dollars) Source: U.S. National Science Foundation +$12.0 billion +72% AAlltthhoouugghh tthhee UUnniitteedd SSttaatteess rreemmaaiinnss tthhee wwoorrlldd’’ss RR&&DD lleeaaddeerr,, wwee aarree eeaattiinngg oouurr sseeeedd ccoorrnn.. WWee aarree nnoott iinnvveessttiinngg iinn aa nneeww ffoouunnddaattiioonn ooff rreesseeaarrcchh tthhaatt wwiillll ffuueell iinnnnoovvaattiioonn 1100,, 2200,, oorr eevveenn 4400 yyeeaarrss ffrroomm nnooww..
- 22. A highly skilledworkforce is the lifeblood of any successful company, industry, or national economy. The United States has historically been the breeding ground for the world’s most innovative companies, in large part, because it offered a diverse pool of talented, highly educated workers. BBuutt eevviiddeennccee ooff aa ddeecclliinnee iiss ssuurrffaacciinngg,, pprreecciippiittaatteedd bbyy tthhrreeee ggaatthheerriinngg ttrreennddss:: aann iinnccrreeaassiinnggllyy iillll-pprreeppaarreedd ddoommeessttiicc wwoorrkk- ffoorrccee;; aa sstteeaaddiillyy ddeepplleettiinngg ssttoocckk ooff hhiigghhllyy sskkiilllleedd aanndd eedduuccaatteedd ffoorreeiiggnn nnaattiioonnaallss;; aanndd aann aaggiinngg ppooppuullaattiioonn.. Policies promoting the free flow of trade, capital, and knowledge go only so far in creating an innovative, entrepreneurial environment. They are necessary --- but not sufficient --- conditions for attracting cutting-edge industries in an increasingly global economy because numerous coun- tries now offer similar incentives. As emerging nations integrate them- selves into the rules-based system of global trade and investment, U.S. leadership is being challenged. As more countries liberalize capital markets, lower tariffs and other trade barriers, and pursue less intervention- ist regulatory policies, the tipping point in choosing where to locate the next cluster of innovation will be the education and skill level of the workforce. Silicon Valley remains an attractive location for technology companies, despite the high cost of living, because it offers access to qualified workers. As the reaction to Sputnik attests, the United States, when motivated, can rededicate itself to improvements in the strategically critical fields of math and science. Congress responded to the Sputnik threat by passing the National Defense Education Act in 1958. This legislation made available $1 billion --- an astonishing figure for the time --- to invest in college loans, scholar- ships, and scientific equipment for schools, focusing on the study of math, science, and foreign languages.41 But this legislation did more than just provide money; it changed the country’s mindset. It woke Americans up and sparked a dialogue for reforming school curricula and reshaping classroom materials and activities. The collaboration between classroom teachers and research scientists represented a fundamental shift in the American education system. Today, that same system is reverting to the lax times of the pre-Sputnik era. Sadly, this phenomenon is not new. America’s “dirty little secret” is that the United States has frequently struggled to persuade enough of its young people to pursue highly technical careers.42 For decades, we have masked these deficiencies by shining a beacon to the world’s best and brightest talent, welcoming them to come study, work, explore new ideas and research fields, and start their own companies in the United States. Frankly, we would not be the country we are today had we not welcomed so many talented people who were fleeing the clutches of fascism, communism, and socialism. This has not only bolstered U.S. innova- tion, but has created hundreds of thou- sands of jobs as these immigrants start companies on American soil. It also produces benefits far beyond the economic realm. FFoorreeiiggnn nnaattiioonnaallss wwhhoo rreettuurrnn hhoommee wwiitthh aann AAmmeerriiccaann eedduuccaattiioonn tteenndd ttoo rreettaaiinn ppoossiittiivvee iimmpprreessssiioonnss ooff tthhee UUnniitteedd SSttaatteess aass tthheeyy bbeeccoommee lleeaaddeerrss iinn tthheeiirr oowwnn ccoouunnttrriieess.. JJuusstt wwhheenn tthhee ccoommppeettiittiioonn ffoorr tthhee bbrriigghhtteesstt mmiinnddss iinn tthhee wwoorrlldd hhaass rreeaacchheedd aa ffeevveerr ppiittcchh,, tthhee UUnniitteedd SSttaatteess hhaass rraaiisseedd tthhee bbaarrrriieerrss aanndd bbuurreeaauuccrraattiicc rreedd ttaappee ttoo tthheeiirr aaddmmiissssiioonn.. Understandable security concerns must be balanced against their consequences for long-term American competitiveness. The United States has a rich tradition of welcoming highly skilled individuals from around the world onto our shores. The benefits to our economy from this influx are incalculable. WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 20 THE UNITED STATES MUST CONFRONT THE CRISIS IN TEACH- ING SCIENCE AND TECHNOLOGY TO OUR STUDENTS; IF WE DO NOT, OUR LEAD IN THESE AREAS IS AT RISK. U.S. HIGH SCHOOL STUDENTS RANK AT OR NEAR THE BOTTOM IN COMPARABLE MATH AND SCIENCE SCORES WORLDWIDE. AMERICAN UNIVERSITIES ARE NOT GRADUATING ENOUGH SCIENTISTS AND ENGINEERS TO SUPPORT GROWTH IN THE HIGH-TECHNOLOGY INDUSTRY. FOREIGN NATIONALS WHO HAVE PREVIOUSLY FILLED THIS VOID ARE FINDING OPPORTUNITIES ABROAD AS BUREAU- CRATIC BARRIERS KEEP THEM OUT OF THE UNITED STATES. THE U.S. WORKFORCE IS INCREASINGLY UNPREPARED FOR THE 21ST CENTURY KNOWLEDGE ECONOMY JJuusstt wwhheenn tthhee ccoommppeettiittiioonn ffoorr tthhee bbrriigghhtteesstt mmiinnddss iinn tthhee wwoorrlldd hhaass rreeaacchheedd aa ffeevveerr ppiittcchh,, tthhee UUnniitteedd SSttaatteess hhaass rraaiisseedd tthhee bbaarrrriieerrss aanndd bbuurreeaauuccrraattiicc rreedd ttaappee ttoo tthheeiirr aaddmmiissssiioonn..
- 23. Over the lastseveral years the proficiency of 4th and 8th grade American students has, for the most part, improved, but the numbers are still unacceptably low. The National Assessment of Educational Progress (NAEP) reported that 35 percent of 4th graders tested proficient in math in 2005, up from 22 percent in 2000. In science, 27 percent of 4th graders tested proficient in 2005, up from 26 percent in 2000. The NAEP found that 28 percent of 8th graders tested profi- cient in math in 2005, up from 25 percent in 2000. In science, 27 percent of 8th graders tested profi- cient in 2005, down from 29 percent in 2000.43 More troubling still is that American 12th graders perform considerably worse. The most recent NAEP data reveal abysmal science and math scores. In both 2000 and 2005, only 17 percent of 12th graders tested proficient in science. Only 23 percent of 12th graders tested proficient in math in 2005. The 12th grade math scores are not directly comparable to previous years.44 TThhee lloonnggeerr AAmmeerriiccaann ssttuuddeennttss ssttaayy iinn sscchhooooll,, iitt sseeeemmss,, tthhee wwoorrssee tthheeyy bbeeccoommee aatt mmaatthh aanndd sscciieennccee aanndd tthhee mmoorree uunnpprreeppaarreedd tthheeyy bbeeccoommee ffoorr tteecchhnniiccaall ccaarreeeerrss.. When comparing American K-12 students to their international counterparts, a similar trend emerges. Among the 25 countries tested, U.S. 4th graders rank sixth in science and 12th in math. Among the 45 countries tested, U.S. 8th graders rank ninth in science and 15th in math.45 Because these highly skilled individuals are a critical link in the U.S. innovation infrastructure, ppoolliiccyymmaakkeerrss mmuusstt uunnddeerrssttaanndd tthhaatt rreevveerrssiinngg tthhee lloonngg-hheelldd ccoommmmiitt- mmeenntt ttoo pprroommoottiinngg iimmmmiiggrraattiioonn aanndd ccuullttuurraall eexxcchhaannggee iiss aa nnaattiioonnaall sseeccuurriittyy rriisskk iittsseellff.. Additionally, in a global economy that portends to be very different from that of the twentieth century, national public policy needs to be viewed through the prism of education as a lifelong process. Through the high growth period spanning the 1940s to the 1970s, workers in all advanced industrial economies tended to follow linear career paths within a particular industry or even one company. In the more dynamic information economy, this trend could all but vanish. In the past, the skills workers learned were good for decades. Now, workers need to constantly adopt new skill sets. Increasingly, the success of an individual, company, or nation will be measured by how well they can adapt to new condi- tions and potential career shifts. Formal education from kindergarten through college will remain crucial in preparing future generations of workers, but education will not end there. The flexibil- ity of the American workforce has served the United States well, and it will have to become even more flex- ible. This will require creative solutions to stimulate continuous education and retraining programs to prepare workers and employers to compete in the knowledge-based economy. This section offers strong statistical indications that defi- ciencies in the American education and immigration systems need to be addressed and reexamined. AMERICAN K-12 EDUCATION IN MATH AND SCIENCE IS NOT UP TO PAR The education of a knowledge workforce starts with K-12. Without a strong background in math and science at the K-12 level, students will struggle to earn degrees in scientific and technical fields, and will be unable to compete for high paying technology jobs. BBuutt eevveenn mmoorree ffuunnddaammeennttaallllyy,, iinn tthhee iinnffoorrmmaattiioonn eeccoonn- oommyy ooff tthhee 2211st cceennttuurryy,, mmoosstt jjoobbss --- nnoott jjuusstt tthhoossee ssppeecciiffiiccaallllyy iinn hhiigghh tteecchh --- wwiillll rreeqquuiirree aa ssoolliidd ggrroouunndd- iinngg iinn mmaatthh aanndd sscciieennccee.. WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 21 0% 50% 100% 8th Grade4th Grade ScienceMath International RRankings iin MMath aand SScience, U.S. aas aa PPercentile oof TTotal CCountries Source: Third International Mathematics and Science Study (TIMSS) 12th of 25 6th of 25 15th of 45 9th of 45 NNaattiioonnaall ppuubblliicc ppoolliiccyy nneeeeddss ttoo bbee vviieewweedd tthhrroouugghh tthhee pprriissmm ooff eedduuccaattiioonn aass aa lliiffeelloonngg pprroocceessss.. FFoorrmmaall eedduuccaattiioonn ffrroomm kkiinnddeerr- ggaarrtteenn tthhrroouugghh ccoolllleeggee wwiillll rreemmaaiinn ccrruucciiaall iinn pprreeppaarriinngg ffuuttuurree ggeenneerraattiioonnss ooff wwoorrkkeerrss,, bbuutt eedduuccaattiioonn wwiillll nnoott eenndd tthheerree..
- 24. Meanwhile, the burdenon families to finance higher education has grown disproportionately. In 1995 the average annual cost of attending a four-year public university was $8,550 and the median family income was $43,346, adjusted for inflation to 2005 dollars. In 2005, these numbers stood at $12,127 and $46,326 respectively, corresponding to a 42 percent rise in higher education costs but only a seven percent increase in median family income. BBeettwweeeenn 22000000 aanndd 22000055,, mmeeddiiaann ffaammiillyy iinnccoommee aaccttuuaallllyy ddeecclliinneedd bbyy tthhrreeee ppeerrcceenntt,, wwhhiillee ttoottaall ccoolllleeggee ccoossttss rroossee bbyy 2288 ppeerrcceenntt..52 The United States has historically recognized the value of promoting higher education for qualified Americans whose academic merit is ample but whose financial resources are lacking. Federal Pell Grants, money targeted for lower income students, have long served this purpose. Unlike student loans, this money does not have to be repaid and therefore does not create a debt burden as graduates enter the job market. The good news is that more students receive Pell Grants now than at any time in the program’s history. In 1985-1986, over 1.2 million students received some level of Pell funding. By 2004-2005 that number had more than quadrupled to over 5.3 million students.53 The bad news is that funding for the Pell Grant program has not matched the demand of an increas- ing number of qualified applicants. In 1985-1986, the maximum Pell Grant covered 54 percent of the total annual cost of attending a public university. By 2004- 2005, this had fallen to 36 percent.54 In other international testing conducted in 2003, American 15-year-olds ranked 22nd in science and 28th in math among 40 of the world’s most devel- oped nations.46 THE U.S. HIGHER EDUCATION SYSTEM IS NOT PREPARING ENOUGH STUDENTS FOR CAREERS IN HIGH TECHNOLOGY The United States benefits from having many of the best colleges and universities in the world. Thirty- two of the world’s top 100 universities and seven of the top 10 are American, as of 2006.47 The United States also boasts an excellent system of technical and community colleges. Despite this, America’s colleges and universities are not graduating enough workers with science, math, and engineering degrees. U.S. high-tech industry employment grew by 10 percent between 1995 and 2004, a period that includes both the technology boom of the 1990s and the subsequent downturn beginning in 2001.48 Yet during this time, the number of engineering bachelor degrees awarded in the United States grew by only two percent, math degrees fell by one percent, and physi- cal science degrees fell by six percent. The only saving grace for the tech industry was that computer science degrees grew by 140 percent during this period.49 At the doctoral level, the growth rate fell for engineering, math, and physical science degrees awarded between 1995 and 2004. Doctoral engi- neering degrees fell by three percent, doctoral math degrees fell by 10 percent, and doctoral physical science degrees fell by 14 percent. Even doctoral computer science degrees only grew by two percent, despite the explosive growth of the Internet during this time.50 And as we will see, many of these graduate students are foreign nationals who may not be allowed to stay in the United States after graduation. HIGHER EDUCATION COSTS ARE OUTPACING FAMILY INCOMES Rising costs in higher education could further exacerbate these downward trends. According to the most recent report by the College Board, a non-profit association of educational institutions, the average cost of attending a four-year public university (including tuition, fees, and room and board) jumped by 7.1 percent in the 2005-2006 school year, to $12,127, adjusted for inflation. This follows four previous years of costs rising at similar rates.51 WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 22 $0 $15,000 $30,000 $45,000 $12,127 $46,326 $9,442 $47,599 $8,550 $43,346 Median Family IncomeTotal Costs 20051995 2000 +7% -3% [ +42% +28% [ Source: College Board and U.S. Census Bureau Higher EEducation CCosts RRose FFaster TThan Family IIncome (in constant 2005 U.S. dollars)
- 25. THE UNITED STATESCONTINUES TO RAISE BARRIERS TO HIGH-SKILLED FOREIGN NATIONALS After two years of decline, international appli- cations to U.S. graduate science and engineering programs rose again for the 2005-2006 academic year. According to the Council of Graduate Schools, international applications to graduate engineering programs rose 17 percent after back-to-back annual declines of seven and 36 percent. International appli- cations to physical sciences programs rose 10 percent after back-to-back annual declines of two and 22 percent. And international applications to life sciences programs rose 16 percent after back-to-back annual declines of two and 24 percent.57 The larger problem is that once these students graduate, they confront the bureaucratic morass of the U.S. immigration system to attain temporary work visas or permanent green cards. WWee eedduuccaattee tthheemm aanndd tthheenn bbaassiiccaallllyy tteellll tthheemm ttoo ggoo hhoommee.. TThhiiss iiss aabbssuurrdd.. TThhee tteecchh iinndduussttrryy hhaass lloonngg aarrgguueedd tthhaatt tthheessee bbrriigghhtt mmiinnddss sshhoouulldd hhaavvee ggrreeeenn ccaarrddss ssttaapplleedd ttoo tthheeiirr ddiipplloommaass.. If foreign nationals perceive that they are no longer wanted here, we risk not only an irreplace- able loss of talent, but a financial shortfall as well. Foreign nationals are more likely than American students to pay full tuition out of pocket. Loss of such significant revenue jeopardizes the long-term viability of many American graduate science and engineering programs. FOREIGN NATIONALS ARE CRITICAL TO OUR EDUCATIONAL SYSTEM, WORKFORCE, INTELLECTUAL PROPERTY DEVELOPMENT, AND JOB CREATION The lackluster growth in technology degrees at American universities is compounded by the fact that foreign nationals comprise an essential pool of qualified talent, yet U.S. visa laws create barriers for these workers to stay and work here. IIff ccuurrrreenntt ppoolliicciieess ccoonnttiinnuuee,, ffoorreeiiggnn nnaattiioonnaallss wwiillll nnoo lloonnggeerr pprroovviiddee aa wwoorrkkffoorrccee ssaaffeettyy vvaallvvee,, aanndd tthhee UUnniitteedd SSttaatteess wwiillll ssuuffffeerr aa bbrraaiinn ddrraaiinn aass UU..SS..-eedduuccaatteedd ffoorreeiiggnn ggrraadduuaatteess aarree ffoorrcceedd ttoo lleeaavvee tthhee ccoouunnttrryy aanndd sseeeekk eemmppllooyymmeenntt eellsseewwhheerree.. In 2004, foreign nationals received 60 percent of U.S. doctoral engineering degrees awarded and 50 percent of U.S. doctoral computer science degrees awarded. This had increased from 50 percent and 40 percent, respectively, in 2002.55 These students are the best and brightest in their fields of study, yet as foreign nationals they must navigate the complex visa and green card process if they wish to remain in the United States. Foreign nationals are also indispensible to the research capacity of the United States. Foreign-born individuals or their children won almost half of the Nobel Prizes awarded to researchers in the United States between 1901 and 1991.56 In the past, these scientists had few alternatives but to come to the United States to conduct their research. Now, they have opportunities around the world. WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 23 0% 40% 80% 60% 50% 53% 46% 44% 41% 7% 8% 5% MathComputer Science Engineering MasterBachelor Doctor Source: U.S. Department of Education Percent oof UU.S. DDegrees AAwarded tto Foreign NNationals 2004 FFoorreeiiggnn-bboorrnn iinnddiivviidduuaallss ccoonndduucctt rreesseeaarrcchh,, aappppllyy ffoorr ppaatteennttss,, aanndd ffoouunndd ccoommppaanniieess.. UUllttiimmaatteellyy tthheeiirr eennttrreepprreenneeuurrsshhiipp,, iinntteelllleecctt,, hhaarrdd wwoorrkk aanndd sskkiillllss ccrreeaattee tthhoouussaannddss ooff hhiigghh ppaayyiinngg jjoobbss.. -40% -20% 0% 20% +10% +16% +17% -2% -2% -7% -22% -24% -36% 200620052004 EngineeringLife Science Physical Science Source: Council of Graduate Schools Change oover PPrevious YYear oof FForeign GGraduate Applications tto UU.S. SSchools 2004 - 22006
- 26. WeAre Still Losingthe CompetitiveAdvantage 2007 American Electronics Association 24 In a post-9/11 world, Americans are under- standably more leery about who is allowed to enter the country. But this must be balanced with concerns for American competitiveness. Policymakers need to be aware of the unintended consequences of keeping out the world’s best and brightest. FFoorreeiiggnn-bboorrnn iinnddiivviidduu- aallss rreepprreesseenntt oonnee ooff eevveerryy ffoouurr sscciieennttiissttss aanndd eennggiinneeeerrss iinn tthhee UUnniitteedd SSttaatteess.. TThheeyy aaccccoouunntt ffoorr oovveerr oonnee mmiilllliioonn wwoorrkkeerrss wwhhoo ccoonnttrriibbuuttee aa ttrreemmeennddoouuss aammoouunntt ooff kknnoowwlleeddggee,, ttaalleenntt,, aanndd iinnnnoovvaattiioonn ttoo tthhee UU..SS.. eeccoonn- oommyy..58 These people conduct research, apply for patents, and found companies that create thousands of high paying jobs. Foreign-born individuals helped found eBay, Google, Intel, Sun Microsystems, and Yahoo! --- to name a very select few. A Duke University study found that oonnee qquuaarrtteerr ooff aallll eennggiinneeeerriinngg aanndd tteecchhnnoollooggyy ccoommppaanniieess ssttaarrtteedd iinn tthhee UUnniitteedd SSttaatteess bbeettwweeeenn 11999955 aanndd 22000055 ccllaaiimmeedd aatt lleeaasstt oonnee ffoorreeiiggnn-bboorrnn ffoouunnddeerr.. TThheessee iimmmmiiggrraanntt-ffoouunnddeedd ccoommppaanniieess ggeenneerraatteedd $$5522 bbiilllliioonn iinn ssaalleess aanndd eemmppllooyyeedd 445500,,000000 wwoorrkkeerrss iinn 22000055..59 If we shut these people out of the United States, we only end up pushing these jobs overseas. The bureaucracy and barriers to bringing skilled workers to the United States have become prohibitively high. H-1B visas are those reserved for high-skilled workers entering the United States on a temporary basis. In the mid-1990s, the congressionally mandated annual cap for H-1Bs was 65,000. As this cap continued to be filled year after year, Congress raised it to 115,000 in 1998 and 195,000 in 2000. Unfortunately, in the wake of 9/11 and the bursting of the technology bubble, Congress reverted to the 65,000 cap. The 65,000 H-1B cap is insufficient to meet the demand for skilled workers. Every year, the United States hits the H-1B cap sooner and sooner. TThhee 22000077 ccaapp wwaass rreeaacchheedd ffoouurr mmoonntthhss bbeeffoorree tthhee ssttaarrtt ooff tthhee ffiissccaall yyeeaarr.60 After that, no new H-1B visas can be granted until the start of the next fiscal year. This means if you found someone in August and wanted to hire them, you would need to wait 14 months before their application would be processed. If the company absolutely needed that worker, the company’s only option is to hire the person in his or her native country, creating a foreign job instead of a U.S. job. OTHER COUNTRIES ARE TAKING ADVANTAGE OF HIGH- SKILLED FOREIGN TALENT Even if the U.S. high-skilled visa process were as open and efficient as it could be, the United States would still face unprecedented competition from abroad. Countries around the world are investing heavily in world class universities and fostering cutting- edge companies, taking a page from the American playbook. These rival universities and companies are competing aggressively with the United States for talented students and skilled workers. And more often than ever before, they are winning. Name && BBirthplace Title Company Employees Annual SSales Andy GGrove Hungary Co-founder & Chairman Intel Corporation 99,900 $38.8 billion Vinod KKholsa India Co-founder Sun Microsystems 38,000 $13.1 billion Pierre OOmidyar France Co-founder eBay 12,600 $4.6 billion Jerry YYang Taiwan Co-founder & Director Yahoo! 9,800 $5.3 billion Sergey BBrin Russia Co-founder & President Google 5,700 $6.1 billion Source: Hoovers Online What HHas HHigh-SSkilled IImmigration GGiven tthe UUnited SStates? Foreign-born = 25% U.S.-born = 75% Source: U.S. National Science Foundation CComposition oof UU.S. SScience && EEngineering WWorkforce By BBirthplace, 22003
- 27. In contrast tothe barriers and bureaucracy of U.S. visa policy, the Japanese government has been proactive in facilitating the entry of highly skilled work- ers to live and work in Japan for an indefinite period. The number of highly skilled foreign workers in Japan nearly doubled between 1992 and 2003, from 138,000 to 268,000.61 This is particularly telling for a country that has traditionally shunned immigration. DEMOGRAPHIC DATA SHOW AN AGING WORKFORCE WITH IMPLICATIONS FOR SCIENCE AND ENGINEERING The United States, like most developed nations, will experience large demographic changes as the baby boom generation ages. Their retirement will create heightened competition for skilled workers and will exacerbate the skilled worker shortage in the United States. Workers with science and engineering skills will be in high demand. The proportion of the U.S. working age popu- lation is shrinking. The percentage of Americans who are 65 or older will grow from 12 percent of the popu- lation in 2005 to 18 percent in 2025. In 2005, there were 4.3 people in the working age population for every person of retirement age; by 2025, this ratio is projected to drop to 2.7 people. To maintain the same proportions in 2025 as in 2005, the United States would need 110 million more working age men and women in the population.62 Similar demographic trends will occur in the European Union and Japan. But these mature economies are less likely to pose the greatest compet- itive challenge to the United States in the coming decades. Many emerging economies in Asia and else- where have younger populations. WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 25 WHY IS THIS A PROBLEM? Other parts of the world exalt science and engineering. In China, Bill Gates is seen as a rock star. In the United States, those who pursue technology careers are seen as geeks and nerds. This attitude is tragic; it embraces ignorance, and ignorance is poison to an economy that runs on technology and innovation. We can’t figure out how it’s not cool to pursue a career where you create something that no one 10 or 20 years ago had even conceived of. How is it not rewarding to look at an innovative product, service, or procedure and say with pride that you took part in its creation? Americans love technology. We love our iPods, our XBoxes, our customized cell phones. As well we should. Unfortunately, too few of our youth now pursue careers where they design and build these innovations. AAmmeerriiccaann ccuullttuurree pprroovviiddeess oouurr kkiiddss wwiitthh mmaannyy ccaarreeeerr ooppttiioonnss bbeessiiddeess sscciieennccee aanndd eennggiinneeeerriinngg.. BBuutt iirroonniiccaallllyy,, wwee ffoorrggeett tthhaatt tthhoossee wwhhoo ppuurrssuuee tteecchhnniiccaall ccaarreeeerrss ccrreeaattee tthhee iinnnnoovvaattiioonnss tthhaatt aallllooww ootthheerr kkiiddss ttoo ppuurrssuuee tthhoossee ooppttiioonnss.. In educating our children, we would be wise to exalt America’s great inventors and innovators. Instead of enticing our children to pursue science and engineer- ing with statistics about how hard the classes are or how likely they are to flunk out, educators would better serve our country by focusing on how scientists and engineers make life changing contributions to society. Instead of scaring freshman by telling them to look left, then right, and realize that at least one of those peers will not graduate, why not remind them that in this country one of those two --- if not themselves --- might just be the next Edison, Einstein, or Gates? As long as American culture reinforces the stereotype that only geeks and nerds go into science and engi- neering, we should not be surprised when we cannot produce enough of these individuals to create the next wave of breakthrough technologies. IIff wwee ccaannnnoott sshhaatttteerr tthhiiss sstteerreeoottyyppee aanndd oouurr nnaattiivvee ttaalleenntt ccoonnttiinnuueess ttoo sstteeeerr cclleeaarr ooff tteecchhnniiccaall pprrooffeessssiioonnss,, tthheenn wwee nneeeedd ttoo uunnddeerrssttaanndd tthhaatt kkeeeeppiinngg oouutt tthhee wwoorrlldd’’ss bbeesstt aanndd bbrriigghhtteesstt iiss nnoott tthhee aannsswweerr.. If we had kept out Andy Grove, Intel might not be the company it is today. If we had kept out Sergey Brin, Google might not have been created here. By kicking this talent out, all we are doing is shooting ourselves in the foot and handing our technological leadership to foreign countries on a silver platter. 0% 50% 100% 53% 35% 20252005 49% 33% 18% 12% 25-640-24 65+ Source: U.S. Census Bureau U.S. PPopulation bby AAge
- 28. CONCLUSION Two years ago,AeA compared America’s myopia about its competitiveness challenge to the fate of the U.S. men’s basketball team in the 2004 Summer Olympics. That so-called Dream Team was startlingly defeated by both Puerto Rico and Argentina, relegating it to a bronze medal. Much like science and technology, basketball was a realm America had always dominated. It was a game invented in the United States --- by Canadian immigrant James Naismith. The 2004 team seemed to believe that a gold medal would fall into its lap as a birthright. Instead, the Americans were shocked as they watched players from other countries --- many of whom had honed their skills in America’s collegiate and professional leagues --- close the talent gap. The U.S. squad was woefully unprepared to compete against upstart teams who frankly played a more cohesive, team-oriented game. Many a commentator rationalized that at least this might serve as a wake- up call: times had changed, and unless the United States adapted to the competition, next time it might fail to earn even a bronze medal. The realization that the United States no longer dominates international basketball may bruise our national pride somewhat, but squandering our competitive edge in science and technology would be far more devastating. The United States is not preordained to lead the world in basketball any more than in scientific and technological advancement. We achieved the latter over the last 60 years by focusing on those factors that made us the most competitive economy in the world. We fostered a technically skilled workforce by educating American youth in math, science, and engineering, and by welcoming --- not shunning --- highly skilled talent from across the globe. We recognized that investment in research and development was critical to promoting technological innovation. Most importantly, we understood that innovation --- taken in its broadest sense as the open acceptance of change and new ideas --- is what fuels our economy. Innovation has created entirely new industries and is largely respon- sible for the dramatic increases in productivity that help raise American wages and living standards. The United States still leads the world, but that lead is precarious. Already other countries are challenging us in key technology arenas. They are pouring investment into the factors of innovation that they saw us invest in for all those years. If we don’t act now to maintain our competitive edge, we should not be surprised if the next wave of breakthrough technologies is created abroad. The rise of other nations is a net plus for the world and even for the United States. Just as heightened interna- tional competition in basketball can force the U.S. squad out of complacency, global challenges to U.S. techno- logical preeminence invite American workers and companies to elevate their game. More innovation and compe- tition worldwide is creating economic opportunity and raising the living standards of billions of people. If innova- tion is created abroad, it will find its way to American consumers. If scientists in a foreign country discover a cure for cancer, then the entire world owes them a debt of gratitude. American lives will be saved along with all the others. But the country where the innovation or discovery occurs will benefit the most. It will gain the intellectual property, the new companies and industries, and the high paying jobs that inevitably cluster around innovation. The purpose of the report AeA released two years ago was to create awareness of how the world was catching up to the United States. We hoped to spark a debate on what to do about it. That debate has taken place, but has resulted in very little action. Our purpose with this new report is to move that debate toward timely and effective action. U.S. policymakers have a golden opportunity to ensure that while other countries are enhancing their competitive- ness, we are enhancing ours. Leaders of both political parties, in both houses of Congress, and in the Administration know what must be done. Over the last two years, we have seen no shortage of creative and vision- ary initiatives, agendas, and legislation introduced. But we have seen far too little action. This needs to change. Until it does, American losses will not be confined to the basketball court. WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 26
- 29. WeAre Still Losingthe CompetitiveAdvantage 2007 American Electronics Association 27 1. Dave Barry, “Ireland, land of Bad Elvis,” The Miami Herald, July 2, 2006. 2. “Tiger, tiger, burning bright,” The Economist, October 14, 2004. 3. “Why worry?,” The Economist, October 14, 2004. 4. Quoted in Fareed Zakaria, The Future of Freedom: Illiberal Democracy at Home and Abroad. (W.W. Norton & Company, 2003), 53. 5. U.S. National Science Foundation, Science & Engineering Indicators (2006), Appendix 2-37. 6. U.S. National Science Foundation, “S&E Doctorates Hit All-time High in 2005,” Info Brief, November 2006. 7. Ibid, Science & Engineering Indicators (2006), Appendix 2-40. 8. Ibid, Appendix 2-42 and Appendix 2-43. 9. Andrew Batson, “China Close to Ending Global Firms’ Tax Break,” The Wall Street Journal, January 25, 2007. 10. International Monetary Fund, World Economic Outlook Database. 11. News Release, “China and India Jockey for the Top Most Attractive Foreign Direct Investment Destination Globally While the U.S. Is Challenged by These Rapidly Evolving Economies,” A.T. Kearney, October 12, 2004. 12. Paul Blustein, “China Passes U.S. In Trade With Japan,” The Washington Post, January 27, 2004. 13. National Intelligence Council, Mapping the Global Future (Central Intelligence Agency, December 2004), 11. 14. U.S. National Science Foundation, Science & Engineering Indicators (2006), Appendix 2-37. 15. “Talent shortage driving up Chinese salaries,” Asia Times, January 23, 2007; based on research conducted by Mercer Human Resources Consulting. 16. Howard W. French, “China Luring Scholars to Make Universities Great,” The New York Times, October 28, 2005. 17. Organization for Economic Cooperation and Development (OECD), OECD Science, Technology, and Industry Outlook (2006). 18. U.S. National Science Foundation, Science & Engineering Indicators (2006), Appendix 5-41. 19. Ibid, Appendix 6-12. 20. Ibid, Appendix 5-61. 21. Michael Mainville, “Russia bears fruit: The West may fault Putin, but a growing middle class savors his vision of democracy,” The San Francisco Chronicle, February 1, 2007. 22. Nicolas Mokhoff, “Russia boosts tech venture funds,” The EE Times, August 10, 2006. 23. “The rise of nearshoring,” The Economist, December 1, 2005. 24. Quote by Janos Koka, Hungarian Minister of Economy and Transport, in: “Upward trends in eastern europe,” FDI Magazine, January 30, 2007. 25. “The rise of nearshoring,” The Economist, December 1, 2005. 26. ITU World Telecommunications Indicators Database. 27. Sarah Lacy, “America: Still the High-Speed Laggard,” BusinessWeek, April 6, 2005. 28. ITU World Telecommunications Indicators Database. 29. Sarah Lacy, “America: Still the High-Speed Laggard,” BusinessWeek, April 6, 2005. 30. Brian Bremner, “China’s Online Gaming Craze,” BusinessWeek, July 24, 2006. 31. Eric Sylvers, “In Italy, a ‘love to talk’ feeds cell phone bonanza,” International Herald Tribune, April 28, 2003. 32. National Intelligence Council, Mapping the Global Future (Central Intelligence Agency, December 2004), 35. 33. First Annual Report of the National Science Foundation, 1950-51. 34. The President’s FY 2008 Budget is available at:http://www.white- house.gov/omb/budget/fy2008/budget.html; the House FY 2007 Continuing Resolution is available at: http://thomas.loc.gov/cgi- bin/query/z?c110:H.J.RES.20: [Accessed February 22, 2007] 35. U.S. National Science Foundation, Science & Engineering Indicators (2006), Appendix 4-6. 36. Ibid, Appendix 4-1 and Appendix 4-6. 37. Ibid, Appendix 4-32. 38. China National Tax Affairs Bureau. Available in Chinese at: http://www.chinatax.gov.cn/print.jsp?code=200309241006475384 [Accessed February 7, 2005] 39. OECD, OECD Science, Technology and Industry Working Papers 4, “Tax Treatment of Investment in Intellectual Assets: An International Comparison,” (2006). 40. U.S. National Science Foundation, Science & Engineering Indicators (2006), Appendix 4-55. 41. Rodger W. Bybee, “The Sputnik Era: Why Is This Educational Reform Different From All Other Reforms?” Prepared for the Symposium “Reflecting on Sputnik: Linking the Past, Present, and Future of Educational Reform” (Washington, DC, October 4, 1997). 42. Fareed Zakaria, “Rejecting the Next Bill Gates,” Newsweek, November 29, 2004. 43. U.S. Department of Education, National Center for Education Statistics. 44. Ibid. 45. International Association for the Evaluation of Educational Achievement, Third International Mathematics and Science Study (TIMSS). 46. Organization for Economic Cooperation and Development (OECD), Programme for International Student Assessment (2003). 47. The Times Higher Education Supplement, World University Rankings (2006). 48. AeA, Cyberstates; and the U.S. Bureau of Labor Statistics. 49. U.S. Department of Education, National Center for Education Statistics. 50. Ibid. 51. The College Board, Trends in College Pricing (2005). 52. Ibid; and The U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States (2005). 53. The College Board, Trends in Student Aid (2005). 54. Ibid. 55. U.S. Department of Education, National Center for Education Statistics. 56. Immigration Policy Center, In Focus, August 2004, Volume 3, Issue 3. 57. Council of Graduate Schools, Findings From 2006 CGS International Graduate Admissions Survey Phase 1: Applications, March 2006. 58. U.S. National Science Foundation, Science & Engineering Indicators (2006), Tables 3-1 and 3-19. 59. Duke University, Master of Engineering Math Program, and the University of California at Berkeley, School of Information, America’s New Immigrant Entrepreneurs, January 2007. 60. Brent Hunsberger, “Temporary Skilled Worker Visas Run Out,” The Oregonian, June 9, 2006. 61. U.S. National Science Foundation, Science & Engineering Indicators (2006), Appendix 3-17. 62. U.S. Census Bureau. CITATIONS
- 30. MORE TESTIMONIALS FROMTHE HIGH-TECH INDUSTRY “For U.S. businesses to compete globally, the United States must promote competition between products, technologies, and firms. Government policies and actions that raise barriers to trade, restrict markets, or otherwise seek to protect firms from international competition weaken the ability of U.S. businesses to compete globally, restrict consumer choice, and stifle innovation. You can't have competitiveness without competition.” Patrick MMoorhead Vice President Advanced Micro Devices Sunnyvale, California “Federal basic research performed in the 1970s was essential to building the scientific knowledge needed for our company and others to develop the growing number of applications of RFID technology that exist today. Unfortunately, federal invest- ment in basic research for the physical sciences and engineering has plummeted by half as a percentage of GDP. The entire technology industry relies on the foundation that federal R&D provides. We need this to continue to sustain American lead- ership in innovation and technology.” Julie EEngland Vice President and General Manager Texas Instruments RFid Systems Dallas, Texas “There is evidence today that the xenophobic climate in the United States, coupled with improved opportunity in their country of origin, have motivated some technologists to leave the United States and go home. The politicians who puff up their chests and represent themselves as protectors of the American worker are doing nothing more than accelerating the tsunami of jobs going overseas. Have they forgotten the role of foreign-born scientists in our development of defense technologies? Would they have sent Albert Einstein back home? Not allowed Andy Grove to stay and build Intel?” Marty SSinger Chairman and CEO PCTEL, Inc. Chicago, Illinois “In 2006, the U.S. Patent & Trademark Office awarded 12 of the top 20 corporate patents to foreign-based entities. The United States is losing ground in research and development --- and in the overwhelming return on investment these activities produce. In a global economy, investment flows to where it is treated best. If we are to ensure sustained long-term compet- itiveness, our immediate directive must be to reinvest in education and R&D.” Greg JJenik COO TAEUS International Corp. Colorado Springs, Colorado “Action in Congress to bolster math and science education could go a long way to change the attitudes of our chil- dren about these fields. We have to change the notion that these careers are only for geeks and nerds. This stereotype is ridiculous. Scientists and engineers do some very cool things. They fly into outer space. They discover sunken ships. They map the human genome. They invent iPods and Xboxes. Sometimes, they even make movies about penguins. What's cooler than that?” Dwight DDecker Chairman and CEO Conexant Systems, Inc. Newport Beach, California WeAre Still Losing the CompetitiveAdvantage 2007 American Electronics Association 28
- 31. Following the releaseof the initial Losing the Competitive Advantage report in February 2005, AeA embarked on an ongoing effort to educate policymakers, the media, and the general public on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. The result has been the AeA Competitiveness Series, an array of concise, four-page reports that combine rigorous data with careful analysis to provide readers the information they need to assess the issue. To date, AeA has published 13 installments of the series and is continuing to add to this collection. Reports currently in preparation address issues such as eHealth, international trade, and the rise of China. All reports can be downloaded for free at: wwwwww..aaeeaanneett..oorrgg//ccss. Select editions of the Competitiveness Series include: The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide industry leaders and policymakers the information they need to assess the issue. Analysis China is an enormously important economic partner for the United States in terms of both trade and investment. Our economies are intricately linked across many sectors, partic- ularly in the production and sale of high-technology goods. And, our economies are becoming more interdependent everyday. China is the sixth largest destination for U.S. high-tech exports. Currently, Hong Kong is not included in these statistics. If it were included, China and Hong Kong combined would be the third largest buyer of American tech products. Like It or Not, China and the U.S. Are Intricately Linked Both Economies Benefit from Growing Trade and Investment $28.1 $27.3 $13.2 $9.1 $9.0 $8.7 $8.6 $8.6 $7.8 $7.710. Hong Kong 9. Singapore 8. Germany 7. Taiwan 6. China 5. South Korea 4. United Kingdom 3. Japan 2. Canada 1. Mexico (IN BILLIONS OF CURRENT U.S. DOLLARS) Source: U.S. Census Bureau Overview BETWEEN 1998 AND 2004, U.S. TECH EXPORTS TO CHINA NEARLY TRIPLED, FROM $3.0 BILLION TO $8.7 BILLION. ONLY FIVE COUNTRIES ARE LARGER EXPORT DESTINATIONS FOR AMERICAN TECH PRODUCTS THAN CHINA; TRENDS INDICATE CHINA COULD RAPIDLY MOVE UP THE RANKS. BETWEEN 1998 AND 2004, U.S. TECH IMPORTS FROM CHINA QUADRUPLED, FROM $16 BILLION TO $68 BILLION. U.S. DIRECT INVESTMENT IN CHINA TOTALED $15.4 BILLION IN 2004, A 34 PERCENT INCREASE OVER 2003. CHINESE INVESTMENT IN THE U.S. REMAINS SMALL BUT IS RISING, UP 59 PERCENT FROM 2003 TO 2004. PUBLIC POLICY IN BOTH CHINA AND THE UNITED STATES MUST RECOGNIZE THE INCREASINGLY INTEGRATED NATURE OF OUR ECONOMIES; PROTECTIONIST MEASURES ON EITHER SIDE ONLY SERVE TO RESTRICT MARKET ACCESS TO CHINA WHILE RAISING PRICES ON CONSUMER GOODS FOR AMERICANS. Volume 4 November 2005 Timely research reports on keeping the United States competitive in a global economy The Competitiveness Series LEADING DESTINATIONS FOR U.S. HIGH-TECH EXPORTS 2004 U.S. Direct Investment Abroad to China 2003 2004 ‘03-’’04 Computers & Electronic Products $1,300 $1,800 38% Total All Industries $11,500 $15,400 34% Chinese Foreign Direct Investment in the United States 2003 2004 ‘03-’’04 Computers & Electronic Products n/a n/a n/a Total All Industries $309 $490 59% FOREIGN DIRECT INVESTMENT BETWEEN THE U.S. AND CHINA 2003 - 2004 (IN MILLIONS OF CURRENT U.S. DOLLARS) 2005 American Electronics Association Source: U.S. Bureau of Economic Analysis This installment of the AeA Competitiveness Series provides an initial analysis of the U.S.-China economic relationship with a focus on the high-tech industry. It does not specifically address the many serious policy issues currently impacting trade and investment between the two countries. With this first report on China, AeA offers the data critical to understanding the U.S.-China economic linkages. AeA will follow up with another report in 2006 that addresses some of the major policy concerns. The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide industry leaders and policymakers the information they need to assess the issue. Analysis Throughout our history, the United States has benefited from attracting many of the most talented minds on the planet. As a nation of immigrants, the United States found a winning formula; these emigrees pursued opportunities they could not find elsewhere and we aas aa ccountry ggained ttheir eentre- preneurship, iintellect, hhard wwork aand sskills, aand tthe tthou- sands oof jjobs tthey ccreated iin tthe UUnited SStates. Though much recent public debate has focused on unskilled, illegal immigration, an entirely different but essential category is often neglected: high-skilled, legal immigration. Specific visa classifications have been created to attract the world’s best and brightest to the United States. The most common are the H-1B and L-1, temporary visas that allow highly skilled foreign nationals to work in the United States for up to seven years. Employers who apply for an H-1B visa must not harm the working conditions of the current work- force, and they must pay the visa holder the prevailing or actual wage for that position (whichever is higher). But is the system meeting the needs of an economy that is fueled by skills and innovation at a time when other coun- tries are aggressively competing for the same talent? The caps on H-1Bs are met sooner and sooner every year. The 22007 ccap wwas rreached ffour mmonths bbefore tthe sstart oof the ffiscal yyear. L-1 holders are forced to leave the country because their green card application is not approved by the time the visa expires. Foreign graduates of American univer- sities cannot obtain visas or green cards to stay in the coun- try, despite having multiple employment offers. And many in the pipeline to come here simply choose to seek opportuni- ties in countries where they feel more wanted. They are confounded by the bureaucracy. The waits are too long and the regulations too inflexible. Foreign nationals of any single country can receive no more than seven percent of available green cards in a specific year. In effect this discriminates against individuals from populous nations that possess huge talent pools, like China and India. Attracting the Best and Brightest to the United States Reforming High-Skilled Visa Policy Volume 9 June 2006 2006 American Electronics Association Overview: SSkilled FForeign NNationals iin tthe UUnited SStates 1 OF EVERY 4 SCIENTISTS AND ENGINEERS IN THE UNITED STATES IS FOREIGN BORN. HALF OF DOCTORAL COMPUTER SCIENCE AND MATH DEGREES AND 60 PERCENT OF DOCTORAL ENGINEERING DEGREES AWARDED IN THE UNITED STATES GO TO FOREIGN NATIONALS. OVER 40 PERCENT OF MASTER’S DEGREES IN ENGINEERING, COMPUTER SCIENCE, AND MATH AWARDED IN THE UNITED STATES GO TO FOREIGN NATIONALS. NEARLY HALF OF ALL NOBEL PRIZES AWARDED TO RESEARCHERS IN THE UNITED STATES BETWEEN 1901 AND 1991 WERE WON BY FOREIGN-BORN INDIVIDUALS OR THEIR CHILDREN. THESE INDIVIDUALS ARE AMONG THE WORLD’S BEST AND BRIGHT- EST; AMERICA’S TECHNOLOGICAL PREEMINENCE IS AT LEAST IN PART BASED ON THEIR CONTRIBUTIONS TO OUR ECONOMY; THEY CONDUCT CUTTING EDGE RESEARCH, LAUNCH INNOVATIVE COMPANIES, AND CREATE MILLIONS OF HIGH-PAYING JOBS. Timely research reports on keeping the United States competitive in a global economy The Competitiveness Series High-SSkilled IImmigration --- DDefinitions EB ((EMPLOYMENT-BBASED) GGREEN CARD --- Temporary visas are often the first step in the longer-term process of gaining perma- nent residency --- the so-called green card. The EB category allows foreign nationals to obtain permanent residency based on possessing specialized employment skills. H-11B --- A visa classification for foreign nationals to be employed in a specialty occupation for a maximum of six years with exceptions. The candidate must hold a bachelor’s degree or its equivalent knowledge, both theoretical and applied. L-11 --- A visa classification for individuals transferring internally from a foreign office to a U.S. office of the same company on a temporary basis. Candidates must be managers/executives or have specialized knowledge. F-44 --- Currently under legislative consideration, this student visa would go to doctoral candidates in science, technology, engi- neering, or math and would be convertible to permanent resi- dent status upon gaining employment after graduation. The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide industry leaders and policymakers the information they need to assess the issue. Just What Is RFID? At the most basic level, radio frequency identification (RFID) is a method for wireless identification. While many see RFID as a new technology, it has actually been in use for over 60 years. It proved to be a critical technology during World War II, used by the British Royal Air Force to identify friendly airplanes. The big difference today is that it is being applied in new ways, spurred on by technology advancements and decreased costs. This paper provides an overview of how RFID technology works and outlines the numerous benefits from the technol- ogy, many of which are already in use. How RFID Works Conceptually, RFID can be compared to the current barcode system, although it utilizes much more advanced electronics technology. RFID allows stored information on chips to be transmitted over radio waves. An RFID tag can be attached to or incorporated into a wide range of products and items, from warehouse pallets and consumer products to livestock and credit cards. RFID tags store specific information that is transmitted through radio waves when activated. This information can be generic, such as a barcode (identifying what the product is --- e.g., nonfat milk, 1 gallon) or unique, such as a serial number (identifying this one specific item --- e.g., nonfat milk, 1 gallon, expires on, bottling company, lot number). More sophisticated RFID tags can be both read and written to, storing additional information on the chip, and a few can even perform basic computational functions. Currently, most RFID tags are read-only devices that contain a unique identification number, which then matches the number with a database. This is similar to license plates, which are only random numbers until matched to a DMV database that contains the identifying information. RFID tags are either passive or active. A passive RFID chip --- the most typical --- does not have an internal power source and will transmit a response only when an incoming radio signal provides the power through the antenna. Passive RFID chips do not constantly send out signals, but must be activated by an external source. Passive RFID tags can be RFID 101: Benefits of the Next Big Little Thing Part 1 of a 2 Part Analysis Volume 5 December 2005 2005 American Electronics Association Overview RFID TECHNOLOGY INCREASES THE EFFICIENCY OF SUPPLY CHAINS, REDUCING LABOR EXPENSES BY UP TO 7.5 PERCENT AND INCREASING SALES BY UP TO 3 PERCENT. RFID TECHNOLOGY SECURES OUR PROPERTY, PREVENTS THEFT, AND SAVES LIVES. THE RFID MARKET IN 2005 IS ESTIMATED TO GENERATE $1.7 BILLION IN PRODUCTS AND SERVICES. THIS REPORT EXPLORES THE BASICS OF WHAT RFID TECHNOLOGY IS AND DISCUSSES THE CURRENT AND FUTURE POTENTIAL BENEFITS FOR THE UNITED STATES. AeA WILL FOLLOW UP THIS REPORT WITH ANOTHER TITLED “RFID: SECURITY, PRIVACY, AND POLICY CONCERNS.” AS SUCH, THIS REPORT PURPOSELY DOES NOT ADDRESS THESE ISSUES. Timely research reports on keeping the United States competitive in a global economy The Competitiveness Series How RFID Works Examples of items that can contain an RFID tag. The RFID reader transmits a radio signal. Once the tag and the reader authenticate one another in a “handshake,” the tag sends its information to the reader. The RFID tag consists of: (1) a chip that typically contains a unique identifying serial number, and (2) an antenna that transmits the data to a reader with the appropriate authorization. Passive RFID chips contain no internal power source and can transmit data only when a reader sends them a signal. The reader transmits data to the database for processing (e.g., debiting an “EZ pass” account or logging movement in a supply chain). A secure database contains the identifying information associated with the serial number on the tag. 1 The radio signal activates the RFID tag. 2 3 4 The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide industry leaders and policymakers the information they need to assess the issue. Analysis A midyear analysis of employment data through June 2006 shows the U.S. high-tech industry continues to add jobs steadily and across a variety of sectors. Data collected by the U.S. Bureau of Labor Statistics and compiled by AeA indicate that the tech industry has generated a net increase in jobs in the United States for five consecutive months and for nine of the previous 12 months. The U.S. high-tech industry added 140,200 net jobs between January and June of 2006, a 2.5 percent increase, for an industry total of 5.81 jobs. This is nearly double the 78,900 tech jobs added in the first half of 2005. Nonetheless, the January to June 2006 tech job growth lags that of the U.S. private sector, which rose by 3.5 percent over that period. The industry has also added jobs over the last 12 months. Tech employment as of June 2005 stood at 5.65 million, compared to 5.81 million in June 2006. This represents an increase of some 150,000 jobs, or 2.7 percent. U.S. Tech Industry Adds 140,000 Jobs in First Half of 2006 Tech Manufacturing Employment Up for Second Year in a Row; Communications Services Adds Jobs for First Time Since 2000 5.0 5.5 6.0 5.58 5.59 5.59 5.60 5.61 5.65 5.66 5.66 5.65 5.67 5.69 5.69 5.67 5.69 5.70 5.73 5.75 5.81 JUN 2006 MAY 2006 APR 2006 MAR 2006 FEB 2006 JAN 2006 DEC 2005 NOV 2005 OCT 2005 SEP 2005 AUG 2005 JUL 2005 JUN 2005 MAY 2005 APR 2005 MAR 2005 FEB 2005 JAN 2005 HIGH-TECH EMPLOYMENT TRENDS* (JANUARY 2005 - JUNE 2006) 2006 American Electronics Association Overview THE U.S. HIGH-TECH INDUSTRY EMPLOYED 5.8 MILLION PEOPLE AS OF JUNE 2006, THE HIGHEST LEVEL SINCE 2002. THE TECH INDUSTRY ADDED NEARLY 140,000 JOBS IN THE FIRST HALF OF 2006, NEARLY DOUBLE THE GROWTH OF THE SAME PERIOD IN 2005. NONETHELESS, JANUARY TO JUNE 2006 TECH JOB GROWTH LAGGED THAT OF THE U.S. PRIVATE SECTOR, 2.5 PERCENT COMPARED TO 3.5 PERCENT. HIGH-TECH MANUFACTURING ADDED JOBS FOR THE SECOND CONSECUTIVE YEAR, 33,100 IN THE LAST SIX MONTHS. THE HIGH-TECH SERVICES SECTORS ADDED 107,000 U.S. JOBS IN THE LAST SIX MONTHS, A RISE OF 2.5 PERCENT. WITHIN THE HIGH-TECH SERVICES SECTORS EMPLOYMENT GROWTH WAS LED BY ENGINEERING AND TECH SERVICES (+49,800), FOLLOWED BY SOFTWARE SERVICES, (+44,500), FOLLOWED BY COMMUNICATIONS SERVICES (+12,700). Volume 12 September 2006 Timely research reports on keeping the United States competitive in a global economy The Competitiveness Series (INMILLIONS) *Not adjusted for seasonal variances +229,200 jobs +4.1% +140,200 jobs +2.5% +78,900 jobs +1.4% The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide industry leaders and policymakers the information they need to assess the issue. Analysis Network neutrality is a wide ranging concept with many facets and many different groups trying to define what it means. Unfortunately, much of the current debate is being driven by network operators, resulting in a one-sided view, full of misleading information. This paper focuses on addressing these misperceptions and on the most contentious part of the debate, the discrimina- tion of Internet traffic on the basis of source or ownership of content. When the Internet was first built it was designed to be content neutral; its purpose was to move data from one place to another in a nondiscriminatory fashion regardless of who provided the original content. Initially, the Federal Communications Commission (FCC) enforced this principle by requiring nondiscriminatory treat- ment by the telecom carriers, where content was delivered on a “best effort” basis, i.e., by treating all “packets” as relatively equal. However, this changed in August 2005 when the FCC effec- tively removed the legal protection of content neutrality for all broadband Internet access providers. This outcome clearly favored telecom carriers. Edward Whitacre Jr., the former CEO of SBC Communications, claimed in BusinessWeek that Internet content providers “use my lines for free --- and that’s bull.” BellSouth’s Chief Technology Officer, William Smith, told reporters that his firm should be able to charge content providers for the opportunity for prioritizing their content. And, Verizon Communications’ Chief Executive Ivan Seidenberg said, “We have to make sure [content providers] don’t sit on our network and chew up our capacity.” Some broadband providers want to be able to offer priority service to those content providers who agree to pay an addi- tional fee beyond what they already pay to access the Internet. Those who can afford to pay the fee would have their content moved to the front of the line. These carriers claim that the next generation of Internet content (such as videos, voice over IP, real-time gaming, and distance learning) requires higher levels of speed and qual- ity than other content, and as a result, must be prioritized ahead of other Internet traffic. To pay for this increased capacity, the network operators argue that they need addi- tional revenue. The Case for Preserving Network Neutrality Keep Innovation and Competition on the Internet Overview NETWORK NEUTRALITY INCLUDES THE CONCEPT THAT TELE- COM AND CABLE COMPANIES, WHICH PROVIDE OVER 92 PERCENT OF CONSUMER BROADBAND INTERNET ACCESS, SHOULD BE PROHIBITED FROM DISCRIMINATING IN THEIR TREATMENT OF INTERNET TRAFFIC. THERE IS THE MISPERCEPTION THAT CONTENT PROVIDERS DO NOT PAY NETWORK OPERATORS FOR ACCESS TO THE INTER- NET. A CONSERVATIVE ESTIMATE SHOWS THAT NETWORK OPERATORS RECEIVE AT LEAST $13.1 BILLION ANNUALLY FROM THE 7.3 MILLION BUSINESS INTERNET SUBSCRIBERS, WHICH INCLUDE CONTENT PROVIDERS OF ALL SIZES. NETWORK OPERATORS ARGUE THAT NET NEUTRALITY WOULD DESTROY COMPETITION AND INNOVATION ON THE INTERNET; THIS IS FALSE. IN FACT, THE U.S. ECONOMY HAS GROWN TREMENDOUSLY AS A RESULT OF NETWORK NEUTRALITY, THE GUIDING PRINCIPLE SINCE THE INCEPTION OF THE INTERNET. AeA SUPPORTS A CONTENT-NEUTRAL INTERNET THAT MAIN- TAINS LOW BARRIERS TO ENTRY, PROVIDES UNFETTERED ACCESS TO LAWFUL CONTENT, AND PROMOTES COMPETITION. CONGRESS NEEDS TO PROTECT CONSUMERS BY AUTHORIZING THE FCC TO ENFORCE THESE PRINCIPLES, PREVENTING DISCRIMINATION ON THE INTERNET. Volume 11 September 2006 Timely research reports on keeping the United States competitive in a global economy The Competitiveness Series 2006 American Electronics Association “I hope that Congress can protect net neutrality, so I can continue to innovate in the internet space. I want to see the explosion of innovations happening out there on the Web, so diverse and so exciting, continue unabated.” Tim Berners-Lee “Creator of the World Wide Web” The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide industry leaders and policymakers the information they need to assess the issue. Analysis The Peruvian Free Trade Agreement holds the promise of new opportunities and expanded markets for U.S. high- tech merchandise exporters, manufacturers, services providers, and their employees. While Peru is a small market when compared with many of America’s other trading partners, it is a strong market for technology products. U.S. high-tech exports to Peru grew by 10 percent in 2005 and have jumped by 23 percent over the last six years. The United States export- ed $428 million in technology merchandise to Peru in 2005. The United States holds a strong high-tech surplus with Peru: $421 million in 2005. Lowering barriers gives U.S. companies a competitive edge in selling their products. U.S. HIGH-TECH TRADE WITH PERU 1999 - 2005 (IN MILLIONS OF CURRENT U.S. DOLLARS) Overview U.S. HIGH-TECH EXPORTS TO PERU TOTALED $428 MILLION IN 2005, UP 10 PERCENT FROM 2004. THE UNITED STATES HAD A HIGH-TECH TRADE SURPLUS OF $421 MILLION WITH PERU IN 2005. AS A PART OF THIS AGREEMENT, PERU WILL JOIN THE WTO’S INFORMATION TECHNOLOGY AGREEMENT, WHICH REMOVES TARIFF AND NON-TARIFF BARRIERS TO TECHNOLOGY PRODUCTS. A PERUVIAN FREE TRADE AGREEMENT GIVES U.S. COMPANIES A COMPETITIVE EDGE AND HELPS OUR SOUTH AMERICAN NEIGHBOR EMBRACE FREE MARKETS. FAILURE TO PASS A FREE TRADE AGREEMENT WITH PERU CEDES OUR COMPETITIVE ADVANTAGE IN THIS REGION TO OTHERS. Volume 7 March 2006 Timely research reports on keeping the United States competitive in a global economy The Competitiveness Series Numbers in the boxes on the graphs repre- sent the trade surplus. +$347m SELECT U.S. TECH EXPORTS TO PERU 1999 VS. 2005 (IN MILLIONS OF CURRENT U.S. DOLLARS) Note: Data are rounded. 2006 American Electronics Association +36% +47% +15% -31% +0% Free Trade Peru Building Blocks for Trade and Free Markets in South America +$394m +$351m +$346m +$387m +$384m +$421m The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide industry leaders and policymakers the information they need to assess the issue. Radio frequency identification (RFID) is an emerging technology that is often misunderstood. Critics often downplay the benefits of RFID while exaggerating its risks to personal privacy and security. While privacy and security concerns are understandable, they are also addressable. In December 2005, AeA published a paper in this series outlining the basics of RFID technology: how it worked and what benefits it offered. This current paper drills down a bit deeper. If our first paper was “RFID 101,” this one can be considered “RFID at the grad- uate level.” It delves into the specific security, privacy, and policy concerns associated with widespread usage of RFID. This paper does not over-hype the potential of the technology, nor does it dismiss the concerns. The tech industry is as concerned as anyone about securing the integrity of personal information. Without a secure system, RFID technology garners mistrust, and that is bad for business. RFID already meets the stringent requirements of securing personal information, and in many ways can do so much more efficiently than other technologies. Concerns vary depending on how the technology is used. RFID can be broken down into two main types of use: Supply Chain Management; and Secure ID/Smart Cards The specific use determines the level of security and privacy concerns. Tags used in supply chain management want to be found. To do their jobs, these tags need to convey their loca- tion and information effectively and efficiently. On the other hand, Secure IDs or Smart Cards need to hide themselves from unauthorized use. The information contained on a Smart Card is valuable and uses strong security measures to protect and restrict the release of its information. Recognizing the end goal of the RFID tag helps determine the security, privacy, and policy goals associated with it. There are many different ways to address these issues, and the concerns raised in these cases are often not specific to RFID technology. Furthermore, AeA strongly believes that while technology can provide solutions for protecting privacy, bad behavior also needs to be punished, and as such we support strong criminal and civil penalties against those who seek to undermine RFID systems. Security and Privacy Concerns about RFID technology fall into four categories: Location/Privacy with Supply Chain RFID Tags; Duplication of RFID-Enabled Secure ID/Smart Cards; Unauthorized Database Access; and Compiling/Selling of Personal Buying Habits. RFID: Security, Privacy, and Good Public Policy Part 2 of a 2 Part Analysis Volume 6 February 2006 2006 American Electronics Association Overview RFID TECHNOLOGY SECURES OUR PRIVACY, PREVENTS THEFT, AND SAVES LIVES. WHILE THERE ARE SOME LEGITIMATE CONCERNS ABOUT RFID TECHNOLOGY, THEY ARE OFTEN EXAGGERATED AND ADDRESSABLE. RFID USES AUTHENTICATION MEASURES AND ENCRYPTION TO PROTECT THE INTEGRITY OF THE SYSTEM. PREMATURE LEGISLATION COULD HINDER DEVELOPMENT OF RFID TECHNOLOGY. THE RFID INDUSTRY HAS WORKED WITH POLICYMAKERS AND OTHER INTERESTED PARTIES, INCLUDING CONSUMER GROUPS, IN CREATING THE HIGHEST SECURITY STANDARDS. Timely research reports on keeping the United States competitive in a global economy The Competitiveness Series Types of RFID Use SUPPLY CHAIN MANAGEMENT --- These are RFID tags that want to be found. Their purpose is to identify and locate a particular item. As a result, these tags use less security and have fewer privacy concerns. SECURE ID/SMART CARDS --- RFID-enabled Secure IDs or Smart Cards hide information and prevent its illicit use. Their purpose is to restrict the information on the card to only those authorized to access it. As a result, these cards use strong security measures and encryption to protect the information on the card. Analysis Imagine never having to fill out paper forms on a wooden clipboard every time you enter a new doctor’s office. Imagine that your entire medical history and profile belonged to you from cradle to grave, accessible to you and any medical practitioner that you authorized. Imagine never delivering a handwritten prescription to a pharmacist or duplicating a procedure because the previous results were unknown or inaccessible. Electronic medical records (EMRs) can make all of this happen. EMRs are one of the major components of health information technology that could transform our healthcare system as we know it. Information technology is not the end-all-be-all to fix our healthcare system, but it provides a major step toward that goal. Information technology (IT) has revolutionized most major industries. Yet the most vital industry of all --- healthcare --- is one of the last to embrace the full benefits of IT. Gartner Research estimates that while the financial services industry spends over seven percent of its budget on IT, the healthcare industry spends only three percent. Instituting a standardized, nationwide EMR network will not be easy. Every stakeholder must be convinced of the bene- fits. This includes patients who fear their privacy being breached, doctors who believe EMRs threaten their work practices, and hospitals and clinics that wonder how they are going to pay for such a huge undertaking. eHealth 101: Electronic Medical Records Reduce Costs, Improve Care, and Save Lives Overview ELECTRONIC MEDICAL RECORDS (EMRS) OFFER A TREMENDOUS OPPORTUNITY TO REDUCE HEALTHCARE COSTS, IMPROVE QUALITY OF CARE, AND SAVE LIVES. ONLY 31 PERCENT OF HOSPITAL EMERGENCY DEPARTMENTS, 29 PERCENT OF OUTPATIENT DEPARTMENTS, AND 17 PERCENT OF DOCTORS’ OFFICES USE EMRS, ACCORDING TO THE U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES. THE RAND CORPORATION FOUND THAT WIDESPREAD, EFFECTIVE USE OF EMRS COULD SAVE THE UNITED STATES AT LEAST $162 BILLION AND POTENTIALLY AS MUCH AS $346 BILLION ANNUALLY. EMRS CAN DRAMATICALLY REDUCE PRESCRIPTION ERRORS; THE VETERANS AFFAIRS EMR SYSTEM HAS HELPED IT ACHIEVE AN ERROR RATE OF LESS THAN 0.003 PERCENT, COMPARED TO THE NATIONAL ERROR RATE OF THREE TO EIGHT PERCENT. A NATIONALLY INTEGRATED EMR SYSTEM WILL IMPROVE HEALTHCARE BY ALLOWING RESEARCHERS ACCESS TO VAST DATASETS --- DETACHED FROM PERSONAL INFORMATION --- TO ANALYZE TRENDS, DETECT PATTERNS, IDENTIFY PROMISING TREATMENTS, AND FLAG DANGEROUS ONES. Volume 13 December 2006 Timely research reports on keeping the United States competitive in a global economy The Competitiveness Series The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide industry leaders and policymakers the information they need to assess the issue. 2006 American Electronics Association ELECTRONIC MEDICAL RECORDS --- DEFINED Electronic medical records (EMRs) are portable computer- based patient medical records that reside within an integrated system that allows authorized medical staff access to patient information from any given location. Fully integrated EMRs include patient medical history, physician and clinical staff notes, automated checks for drug and allergy interactions, clinical decision support systems, computerized orders for prescriptions and lab tests, test results, billing, and scheduling capabilities. $77 billion $4 billion $81 billion $346 billion $7.7 billion Estimated annual cost of implementing EMRs over 15 years Annual savings from all of the above categories combined with improved care resulting from use of the data to analyze treatment methods Annual savings from improved management of chronic disease Annual savings from improved safety, primarily reduced prescription errors Annual savings from increased efficiencies and reduced duplication of procedures Source: RAND ELECTRONIC MEDICAL RECORDS Cost of Implementation vs. Potential Savings The AeA research team produces regular reports on the most timely and relevant issues to the high-tech industry and to U.S. competitiveness in a global economy. We combine rigorous data with careful analysis to provide industry leaders and policymakers the information they need to assess the issue. Analysis Research and development (R&D) is the building block of future economic growth and prosperity. R&D generates scientific breakthroughs, spawns innovative products and processes, and enhances productivity. It creates wealth, intellectual property, and high paying jobs. These benefits extend far beyond the company or entity doing the research. The United States has long recognized the economic bene- fits of encouraging R&D, whether performed by government entities, academic institutions, or private companies. Each has played a pivotal role in contributing to America’s preeminence in science, technology, and innovation over the second half of the twentieth century. This windfall to our economy is incalculable. But the world is changing and continued preeminence is not assured. In recent years the global market for research and development has become intensely competitive. Countries offering tax holidays and incentives are courting American businesses to perform R&D on their shores. To meet this competition, the United States must become more proactive. In 2004, U.S. industry spent $184 billion on R&D, compared to $86 billion by the U.S. government. These large industry expenditures are facilitated by tax policy that provides incentives to the private sector to perform R&D that would not otherwise result in a return on investment. To keep these expenditures in the United States the R&D tax credit --- currently expired --- must be strengthened, renewed, and made permanent. Strengthen the R&D Tax Credit and Make It Permanent American Innovation and Competitiveness Depend on It Overview SINCE ITS INCEPTION IN 1981, THE R&D TAX CREDIT HAS BEEN EXTENDED 11 TIMES, COMPLETELY LAPSED ONCE, AND IS CURRENTLY EXPIRED. THE CREDIT IS CLAIMED ANNUALLY BY BETWEEN 14,000 AND 16,000 FIRMS DISTRIBUTED RELATIVELY EVENLY BY SIZE. THE U.S. BUREAU OF LABOR STATISTICS ESTIMATES THAT EVERY DOLLAR OF TAX BENEFIT HAS SPURRED AN ADDITIONAL DOLLAR IN PRIVATE RESEARCH AND DEVELOPMENT. MANY COUNTRIES HAVE PASSED STRONGER INCENTIVE PROGRAMS, INCLUDING IMPLEMENTING A PERMANENT TAX CREDIT, AND ARE ACTIVELY WORKING TO ATTRACT R&D DOLLARS AND JOBS AWAY FROM THE UNITED STATES. THE LACK OF A CONSISTENT U.S. R&D TAX CREDIT MAKES FOREIGN INCENTIVES FOR R&D MUCH MORE ATTRACTIVE TO COMPANIES. IN 2003, U.S. AFFILIATES INVESTED $28.8 BILLION ON R&D IN FOREIGN COUNTRIES, UP 72 PERCENT FROM 1999. Volume 10 August 2006 Timely research reports on keeping the United States competitive in a global economy The Competitiveness Series 2006 American Electronics Association Source: The R&D Credit Coalition R&D Tax CCredit - DDefined The R&D tax credit, officially called the Research and Experimentation Tax Credit (RETC) was created in 1981 as part of the Economic Recovery Act to encourage U.S. firms to conduct R&D domestically. When active, the RETC provides a 20 percent tax credit for all qualified U.S.-based research and development expenditures in excess of a calculated amount that is based on the company’s past R&D expenditures. Country Tax Incentive Australia 125% deduction for R&D expenses; 175% deduction for R&D expenditures exceeding a base amount of prior-year spending Canada A permanent 20% flat R&D tax credit, combined with many provincial incentives and tax credits China 150% deduction for R&D expenditures, provided that R&D spending has increased by 10% from the prior year India Companies conducting scientific R&D are entitled to a 100% deduction of profits for 10 years United SStates The U.S. R&D tax credit expired on December 31, 2005 INTERNATIONAL R&D TAX INCENTIVES Like IIt oor NNot, CChina and tthe UU.S. AAre Intricately LLinked China is an enormously important economic partner for the United States in terms of both trade and investment, particularly in the high- tech sector. This inter- dependence benefits both countries.November 22005 RFID 1101: BBenefits oof the NNext BBig LLittle TThing How does RFID technol- ogy work and what are its current and potential benefits for the United States? This report serves as a primer for our follow-up report on privacy and security concerns associated with RFID. RFID: SSecurity, PPrivacy, and GGood PPublic PPolicy This second report on RFID discusses how authentication and encryption technologies protect RFID-enabled devices from illicit and malicious use in both supply chain manage- ment and Secure IDs/Smart Cards. Attracting tthe BBest aand Brightest tto tthe UUnited States The U.S. visa and green card system that helps bring the best and brightest to the United States is broken. These highly skilled people spur U.S. innovation and create thousands of high-paying jobs. eHealth 1101: EElectronic Medical RRecords The first in our series on eHealth, this report discusses how electronic medical records (EMRs) offer a tremendous opportunity to reduce healthcare costs, improve quality of care, and save lives. Mid-yyear TTech Employment UUpdate The U.S. high-tech industry added 140,000 jobs in the first half of 2006, nearly double the growth of the same period in 2005. Tech manufac- turing employment is rising for the second year in a row. The CCase ffor PPreserving Network NNeutrality This report makes the case for promoting innovation and compe- tition on the Internet by upholding the guiding principles of network neutrality that have governed the Internet since its inception. Strengthen tthe RR&D TTax Credit aand MMake IIt Permanent This report highlights how critical industry funded R&D has been to the United States. But the lack of a consis- tent R&D tax credit makes foreign incen- tives for R&D much more attractive. Free TTrade PPeru The Peruvian Free Trade Agreement promises new opportunities and expanded markets for U.S. high-tech exporters, manufacturers, services providers, and their employees. Peru is a small but strong and growing market for tech products. December 22006 August 22006 September 22006 June 22006 September 22006 March 22006 February 22006December 22005 Timely resea rch repo rts o n k eeping the United Sta te s competitive in a globa l economy The Competitiveness Series
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