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A Fund of Contention
A Fund of Contention
September 27, 1999
Originally published in Financial Times
Whom would you prefer to make strategic decisions for your high-tech business (or one whose stock you own): bureaucrats, or experienced entrepreneurs, venture capitalists and the marketplace?
It is a question that comes to mind when considering the many manifestations of "corporate welfare" - government subsidies to businesses that do not make sense. These include direct payments to companies furnishing public goods or services at below-market value, government purchases of goods or services at above-market value, tax breaks, and exemptions from otherwise applicable laws and regulations.
Corporate welfare is no respecter of national boundaries. In Australia, for example, there was recent criticism of a A$5m ($3.26m) Australian federal programme to "encourage investment" in the nation's automotive, manufacturing sector
Such initiatives draw opposition from aggressive, highly competitive entrepreneurs and company executives. They say it distorts the marketplace by substituting bureaucrats' amateur judgments tor market forces. Worse still, industry falls victim to the vicious circle' created by government's taxing and spending to "support" commercial growth.. With corporate taxes high, companies lobby for give-backs to remain competitive,' leading to higher taxes and new tax-and-spend cycle. Generally, therefore, corporate welfare is a bad idea. A case in point is the US Department of Commerce's Advanced Technology Pro- gramme, a perennial favourite of the Clinton administration, which has proposed a' 21 per cent budget boost in the next fiscal year, to $237.8m.
The programme distributes largess for research that in most cases would have been funded anyway by the private sector.
Among the awards last year were projects focused on relatively late-stage applied research. Such investigations, while unlikely to contribute substantial new knowledge, may advance product development for an individual company.
The programme is generous. Its 21 general competition awards in 1998 averaged $2.21m, while eminent laboratories at big research tun-versifies routinely operate on no more than a few hundred thousand dollars a year. The recipients of_ grants include some of the largest, most successful US high-tech companies' National Semiconductor and General Electric were among last' year's winners - for work that is often highly focused, applied and commercial.
The awards are also inefficient. Audits by the accounting arm of Congress, the General Accounting Office (GAO), have found that many programme grahtees' charge ''overhead costs" that exceed actual research' expenses. Moreover, a survey by the GAO found that 63 per cent of applicants had not sought Private sector funding before applying for a programme grant, and roughly half said they would go forward with their projects even in the absence of such funding. Some industry executives defend the programme, however, as a source of "risk-sharing" capital that enables them to undertake research they otherwise could not afford. But it can have invid ious effects as investors can lose money if a company has a' rival that is being subsidised by awards from the programme
The US Commerce Depart- ment 'appears to have modelled the programme on the successes of venture capitalists, but with the handicap of bureaucrats trying to pick the winners and losers among high-tech projects.
The "essential features of the Advanced Technology Programme", as described on its own web site, are virtually indistinguishable from those of venture capital companies: to "promote large economic benefits [and] ... work as a partner with industry ... Projects are selected on the basis of both technical and business
The programme even uses -taxpayers' dollars to evaluate grantees' business plans.
So what its the alternative? If government funds. are „to be spent in this area,' they would be far more effectively used to support early-stage, pre-commercial research. Such basic research generates knowledge that could be, applicable to many companies and industrial sectors, and even spawn whole new industries. Individual companies sometimes have difficulty justifying it, however, given the problems involved in fully capitalising on its benefits.
The support of basic research has been the focus of the highly successful programmes of the US National Institutes of Health and National Science Foundation. As the world's largest supporters of science and technology, they invest in' the essential fundamental research that generates new fields of technology and industry.
Previous successes include biotechnology, stroboscopy and fibre optics. With programmes like that, why continue with corporate welfare?