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The United States clearly needs an explicit policy toward research and development for high technology products and manufacturing processes. Gomory & Schmitt (1988) and Cohen & Zysman (1988) present qualitative arguments that this is so. Our research into the technology of semiconductors, computers, and telecommunication equipment (Norsworthy and Jang, 1992) provides concrete quantitative evidence as well. The costs of research and development and early manufacturing experience coupled with the nearly costless diffusion of the results of these activities, create special economic circumstances in most high technology industries. These circumstances are more complex than economies of scale, but equally powerful in their implications for market behavior. Like economies of scale, these circumstances will favor those organizations and countries whose competitive strategies acknowledge their existence, and most successfully exploit their effects. They involve aspects not only of scale economies, but of public goods, learning curves, the time value of information, and the after tax cost of capital. In this essay we attempt to describe the phenomena and illustrate them by reference to the semiconductor and related industries. It is generally understood that the benefits of research are difficult to capture by the company or industry that undertakes the research; the more basic the research, the more difficult it will generally be for the sponsoring agency to capture its benefits. Therefore, profit-seeking enterprises under conditions of competition will generally undertake less research than would be optimal from the point of view of society as a whole. A number of studies, confirm this general proposition (Griliches, 1987; Mansfield et al., 1982). Their estimates of the overall rate of return to R&D to the whole society is far above the return to private investment in general. These facts have been recognized in federal government policies that encourage research through the National Science Foundation, the National Institutes of Health, the R&D tax credit, and so forth.
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