Industrial Research

INDUSTRIAL RESEARCH

INDUSTRIAL RESEARCH. The emergence and growth of industrial research and development during the twentieth century must rank as one of the most important economic developments in modern American history. There is no doubt that technological innovation is the primary driver of economic growth, and that it is the business firm that is at the core of the American system of technological innovation. Industrial research conducted by and substantially funded by business firms has thus played a key role in American prosperity. It was also key to the outcomes in both world wars, and arguably to the ending of the Cold War. What then, is the genius behind this system? How did it emerge, how does it work, and how did it change in the twentieth century?

Industrial research and development (R&D) is the activity in which scientific and engineering knowledge is used to create and bring to market new products, processes, and services. R&D encompasses several different activities that can occur in any order. There is basic research, which is aimed purely at the creation of new knowledge. Its purpose is to create new understandings of phenomena. Its core foundations are usually quite abstract. There is applied research, which is work expected to have a practical, but not a commercial, payoff. While basic research is aimed at new knowledge for its own sake, applied research has practicality and utility as its goal. There is also development, in which the product is honed for commercial application. Boundaries among these activities are quite fuzzy, and the manner in which they have been organized and linked has changed over time.

The roots of American industrial research can be found in the late nineteenth century when a discernible amount of science and technology began being applied to industry. This is the period when the science-based industries in dyestuffs, chemicals, electricity, and telecommunications began to emerge.

The first organized research laboratory in the United States was established by the inventor Thomas Edison in 1876. In 1886, an applied scientist by the name of Arthur D. Little started his firm which became a major technical services/consulting firm to other enterprises. Eastman Kodak (1893), B. F. Goodrich (1895), General Electric (1900), Dow (1900), DuPont (1902), Goodyear (1909), and American Telephone and Telegraph (AT&T; 1907) followed soon thereafter.

Growth of the Organized R&D Laboratory (1890–1945)

The industrial laboratory constituted a significant departure from an earlier period when innovation was largely the work of independent inventors like Eli Whitney (the cotton gin), Samuel Morse (telegraph), Charles Goodyear (vulcanization of rubber), and Cyrus McCormick (the reaper).

The founding of formal R&D programs and laboratories stemmed in part from competitive threats. For instance, AT&T at first followed the telegraph industry's practice of relying on the market for technological innovation. However, the expiration of the major Bell patents and the growth of large numbers of independent telephone companies helped stimulate AT&T to organize Bell Labs. Competition likewise drove George Eastman to establish laboratories at Kodak Park in Rochester, New York, to counteract efforts by German dyestuff and chemical firms to enter into the manufacture of fine chemicals, including photographic chemicals and film.

During the early years of the twentieth century, the number of research labs grew dramatically. By World War I there were perhaps as many as one hundred industrial research laboratories in the United States. The number tripled during the war, and industrial R&D even maintained its momentum during the Great Depression. The number of scientists and research engineers employed by these laboratories grew from 2,775 in 1921 to almost 30,000 by 1940. The interwar period also saw the industrial research labs produce significant science. In 1927 Clinton Davisson began his work at Bell Labs on electron defraction. His work led to a Nobel Prize in physics in 1937. At DuPont, Wallace Carothers developed and published the general theory of polymers, and went on in 1930 to create synthetic rubber; and then, a strong, tough, water-resistant fiber called nylon. These technological breakthroughs were in and of themselves of great importance, but it took time and money to leverage them into marketable products. For instance, over a decade elapsed to get from the beginning of research in super polymers to the production of nylon on commercial terms.

The Golden Era of "Big Science" (1945–1980)

Building on wartime success, including the Manhattan Project, the era of big science began, fueled by the optimism that well-funded scientists and engineers could produce technological breakthroughs that would benefit the economy and society. University scientists, working together with the engineers from corporate America, had indeed produced a string of breakthrough technologies including radar, antibiotics, the digital electronic computer, and atomic energy. The dominant intellectual belief of the immediate postwar period was that science-driven research programs would ensure the development of an endless frontier of new products and processes. The development of the transistor at Bell Labs gave strength to this view. Many firms augmented their commitments to industrial R&D. For instance, in 1956 IBM established a research division devoted to world class basic research.

As tensions increased during the Cold War, government funding increased considerably. In 1957, government funding of R&D performed by industry eclipsed the funding provided by the firms themselves. By 1967, it went back the other way, with private funding taking the lead. By 1975, industry funding of industry conducted R&D was twice the federal level, and the ratio was expanding. Government procurement was perhaps even more important to the technological development of certain industries, as it facilitated early investment in production facilities, thus easing the cost of commercialization. The newly emergent electronics industry in particular was able to benefit from the Defense Department's demand for advanced components and advanced products. By 1960, the electronics industry had come to rely on the federal government for 70 percent of its R&D dollars. Perhaps as an unfortunate consequence, the United States ceased to be the leader in consumer electronics as it became preoccupied with the requirements of the U.S. military, which was more performance-oriented in its requirements than the consumer markets.

By the early 1970s, however, management was beginning to lose faith in the science-driven view of industrial research and technological innovation, primarily because few blockbuster products had emerged from the research funded during the 1950s through the 1970s.

From the mid-1970s on, there has been a marked change in organization and strategy, as both industry and government have come to recognize that the classical form of R&D organization—with centralized research and a science driven culture—was simply not working, in part because new technology was not getting into new products and processes soon enough. Foreign competitors began undermining the traditional markets of many U.S. firms.

Many companies were confronted by the paradox of being leaders in R&D and laggards in the market. The fruit of much R&D was being appropriated by domestic and foreign competitors, and much technology was wasting away in many research laboratories. In telecommunications, Bell Lab's contribution to the economy at large far outstripped its contribution to AT&T. In the semi-conductor industry, Fairchild's large research organization contributed more to the economy through the spin-off

companies it spawned than to its parent. Xerox Corporation's Palo Alto Research Center made stunning contributions to the economy in the area of the personal computer, local area networks, and the graphical user interface that became the basis of Apple's Macintosh computer. Xerox shareholders were well served too, but most of the benefits ended up in the hands of Xerox's competitors.

Emergence of the "Distributed" Approach to Industrial R&D

Different modes of organization and different funding priorities were needed. The distinctive competence of firms was understood to depend upon knowledge diffused throughout the firm and embedded in new products promptly placed into the marketplace, rather than being confined to the R&D laboratory. A new way of conducting R&D and developing new products was needed.

By the 1980s and 1990s, a new model for organizing research became apparent. First, R&D activity came to be decentralized inside large corporations themselves, with the aim to bring it closer to the users. Intel, the world leader in microprocessors, was spending over $1 billion per year on R&D, but did not have a separate R&D laboratory. Rather, development was conducted in the manufacturing facilities. It didn't invest in fundamental research at all, except through its funding of Sematech and university research.

Second, many companies were looking to the universities for much of their basic or fundamental research, maintaining close associations with the science and engineering departments at the major research universities. Indeed, over the century the percentage of academic research funded by industry grew from 2.7 percent in 1960 to 6.8 percent in 1995. However, strong links between university research and industrial research is limited primarily to electronics (especially semiconductors), chemical products, medicine, and agriculture. For the most part, university researchers are insufficiently versed in the particulars of specific product markets and customer needs to configure products to the needs of the market. Moreover, in many sectors the costs of research equipment are so high that universities simply cannot participate.

Third, corporations have embraced alliances involving R&D, manufacturing, and marketing in order to get products to market quicker and leverage off complementary assets already in place elsewhere. (It is important to note, however, that outsourcing R&D is a complement,

Table 1

Industrial R&D Expenditures by Funding Source:1953–1997 (millions of 1998 U.S. dollars)
Note: Data are based on annual reports by performers except for the nonprofit sector; R&D expenditures by nonprofit sector performers have been estimated since 1973 on the basis of a survey conducted in that year.
*These calendar-year expenditure levels are approximations based on fiscal year data.
(a) For 1953–1954, expenditures of industry Federally Funded Research and Development Centers (FFRDC) were not separated out from total federal support to the industrial sector. Thus, the figure for federal support to industry includes support to FFRDCs for those two years. The same is true for expenditures of nonprofit FFRDCs, which are included in federal support for nonprofit institutions in 1953–1954.
(b) Industry sources of industry R&D expenditures include all non-federal sources of industry R&D expenditures.
source: National Science Foundation, Division of Science Resources Studies (NSF/SRS). National Patterns of R&D Resources: 1998. Arlington, Va.: NSF/SRS, 1998.
Calendar year*	Total	Federal Government a	Industry b
1953	3,630	1,430	2,200
1954	4,070	1,750	2,320
1955	4,517	2,057	2,460
1956	6,272	2,995	3,277
1957	7,324	3,928	3,396
1958	8,066	4,436	3,630
1959	9,200	5,217	3,983
1960	10,032	5,604	4,428
1961	10,353	5,685	4,668
1962	11,037	6,008	5,029
1963	12,216	6,856	5,360
1964	13,049	7,257	5,792
1965	13,812	7,367	6,445
1966	15,193	7,977	7,216
1967	15,966	7,946	8,020
1968	17,014	8,145	8,869
1969	17,844	7,987	9,857
1970	17,594	7,306	10,288
1971	17,829	7,175	10,654
1972	19,004	7,469	11,535
1973	20,704	7,600	13,104
1974	22,239	7,572	14,667
1975	23,460	7,878	15,582
1976	26,107	8,671	17,436
1977	28,863	9,523	19,340
1978	32,222	10,107	22,115
1979	37,062	11,354	25,708
1980	43,228	12,752	30,476
1981	50,425	14,997	35,428
1982	57,166	17,061	40,105
1983	63,683	19,095	44,588
1984	73,061	21,657	51,404
1985	82,376	25,333	57,043
1986	85,932	26,000	59,932
1987	90,160	28,757	61,403
1988	94,893	28,221	66,672
1989	99,860	26,359	73,501
1990	107,404	25,802	81,602
1991	114,675	24,095	90,580
1992	116,757	22,369	94,388
1993	115,435	20,844	94,591
1994	117,392	20,261	97,131
1995	129,830	21,178	108,652
1996	142,371	21,356	121,015
1997	155,409	21,798	133,611

not a substitute, to in-house R&D.) Outsourcing and codevelopment arrangements had become common by the 1980s and 1990s (for example Pratt & Whitney's codevelopment programs for jet engines) as the costs of product development increased, and as the antitrust laws were modified to recognize the benefits of cooperation on R&D and related activities. The National Cooperative Research Act of 1984 and its amendment in 1993 provided greater clarity with respect to the likely positive treatment of cooperative efforts relating to technological innovation and its commercialization. Cooperation was also facilitated by the emergence of capable potential partners in Europe and Japan.

These developments meant that at the end of the twentieth century, R&D was being conducted in quite a different manner from how it was organized at the beginning of the century. Many corporations had closed their central research laboratories, or dramatically scaled back, including Westinghouse, RCA, AT&T, and Unocal to name just a few. Alliances and cooperative efforts of all kinds were of much greater importance.

Importantly, a transformation in industry structure brought about through venture capital funded "start-ups" was well under way. New business enterprises or "startups" were in part the cause for the decline of research laboratories; but in many ways the start-ups still depended on the organized R&D labs for their birthright.

The Role of Start-ups and Venture Capital

Beginning in the late 1970s, the organized venture capital industry, providing funding for new enterprise development, rose to significance. This was particularly true in industries such as biotech and information services. While venture capital in one form or another has been around for much of the twentieth century—the Rockefellers, Morgans, Mellons, Vanderbilts, Hillmans, and other significant families had been funding entrepreneurs for quite some time—institutional sources of money, including pension funds and university endowments, had become significant sources by the 1980s. This dramatically increased the funds that were available, as well as the professionalism by which "the money" provided guidance to a new breed of entrepreneurs, eager to develop and market new products.

As a result, venture funded start-ups have proliferated in many sectors. Thus while in the 1970s Apple Computer "bootstrapped" itself into the personal computer industry, in the 1980s Compaq and others received large infusions of venture capital to get started in the computer industry. In biotechnology, venture funding has also grown to great significance. However, it is extremely unusual for venture funds to support the efforts of companies making investments in early stage research. Rather, venture funding tends to be focused on exploiting research, not doing it. Successful start-ups frequently begin with an idea, and often personnel, that has been incubated to some level in a research program of an already established firm. Absent incumbent firms and their research programs, there would be far fewer start-ups. Figure 1 shows that significant venture funding was present in the early 1990s, and that it grew drastically from 1995 on, in part driven by the Internet boom. In 1995, however, it had risen to a level equal to 5.5 percent of the funds allocated by industry to R&D ($6 billion, compared to $108 billion). The comparison, however, should be used with care, because only a fraction of venture capital disbursements are likely to qualify as R&D. Nevertheless, the phenomena of venture funding is significant, as it is now a very important channel by which new products and processes come to the market.

Conundrum at the New Millennium

At least compared to half a century earlier, privately funded research had become more short run in its focus, and more commercial in its orientation at the millennium. International competition and the competition from spin-outs forced that outcome. The leakage of technology was such that the earlier stage the research was, the greater the chance one's competitors would also benefit from it. For example, half a century earlier, AT&T could rely on the Bell operating companies (BOCs) to each more or less pay their pro-rata share of the cost of Bell Labs; but the BOCs were divested in 1984. Their contracts to pay a fixed percent of revenues to supporting research and development were set aside in the breakup of AT&T. There no longer was an easy appropriability mechanism in place.

By 2000, it was easy in many cases to get a free ride on the efforts of others, scooping up from the public domain the product of R&D funded by others. Domestic and foreign rivals were so quick and capable that it was extremely difficult to justify the support for long-range research.

Industry and society was thus left with a deep concern—the concern that insufficient resources were being invested in the scientific "seed corn." Perhaps the solution would lie in more collective funding of research? Perhaps industrially relevant basic and applied research in universities could be expanded? The issues related more to the allocation of resources than to the amount. Clearly, as shown in Table 1, the federal government had continued throughout the postwar period to provide considerable resources to support industrial R&D. But whereas it was more than half of the total in 1960, it was only about 16 percent by 1995. A reallocation of resources from government labs to private and university labs would be one possible avenue to improve programs and augment prosperity.

BIBLIOGRAPHY

Chandler, Alfred D. Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, Mass.: Belknap Press, 1990.

Houndshell, David A. "The Evolution of Industrial Research in the United States." In Engines of Innovation: U.S. Industrial Research at the End of an Era. Edited by R. S. Rosenbloom and W. J. Spencer. Boston: Harvard Business School Press, 1996.

Mansfield, Edwin. The Economics of Technological Change. New York: Norton, 1968.

Moore, Gordon E. "Some Personal Reflections on Research in the Semiconductor Industry." In Engines of Innovation: U.S. Industrial Research at the End of an Era. Edited by R. S. Rosenbloom and W. J. Spencer. Boston: Harvard Business School Press, 1996.

Mowery, David C. "The Emergence of Growth of Industrial Research in American Manufacturing, 1899–1945." Ph.D. diss., Stanford University, 1981.

Teece, David J. "Profiting from Technological Innovation." Research Policy 15, no. 6 (1986): 285–305.

———. "The Dynamics of Industrial Capitalism: Perspectives on Alfred Chandler's Scale and Scope (1990)." Journal of Economic Literature 31 (March 1993).

David J. Teece

See also AT&T ; Bell Telephone Laboratories ; Capitalism ; Laboratories .