IPTS-ESTO Techno-Economic Analysis Report 1998

June 1999

Project Management:
Dimitris Kyriakou, IPTS Ahti Salo, VTT

Editors:
Jorma Lievonen, VTT Juan Carlos Cscar, IPTS

Contributors to the Report:

Celia Greaves, and Tonino Amorelli (CEST) Seppo Laaksonen (Statistics Finland) Huub Meijers (MERIT) Marie-Laure Spaak (ADIT) Petra Dx, Heinz Eickenbusch, and Anette Schmitt (VDI) Qiwen Lu, and William Lazonick (INSEAD) Leonid Gokhberg (CSRS)

Acknowledgments to the following reviewers:

From the IPTS: Bellido F., Bohlin E., Burgelman J. C., Calenbuhr V., Dorda A., Ducatel K., Fleissner P., Frotschnig A., Hemmelskamp J., Hernndez H., Ibarreta D., Isoard S., Leone F., Maqueda J. M., Papameletiou D., Mnker T., Rojo J., Triebswetter U., Wolf O., Zwick A., and Bontoux, L. (now at DG XII)

From EU Delegations, Scientific Counselors: Maurice Bourne (Japan), Patrice Laget (U.S.), Jochen Naegele (Russia) and Jos Luis Valls (China)

EUR 18964 EN

 ECSC-EEC-EAEC, Brussels Luxembourg, 1999 The views expressed in this study do not necessarily reflect those of the European Commission (EC). The European Commission retains copyright, but reproduction is authorised, except for commercial purposes, provided the source is acknowledged: neither the European Commission nor any person acting on behalf of the Commission is responsible for the use which might be made of the following information. Printed in Spain

IPTS-ESTO Techno-Economic Analysis Report 1998

Contents

ABOUT THE IPTS-ESTO TECHNO-ECONOMIC ANALYSIS REPORT ....................................... 1 PART I: EXECUTIVE SUMMARY ........................................................................................................ 3 1. Introduction........................................................................................................................................ 3 2. Contextual observations .................................................................................................................... 3 3. Highlights of the report ...................................................................................................................... 4 4. Conclusion ......................................................................................................................................... 6 PART II: TECHNO-ECONOMIC DEVELOPMENTS ........................................................................ 7 1. THE ENVIRONMENT: THE ULTIMATE CHALLENGE FOR PUBLIC POLICY AND PRIVATE MANAGEMENT ................... 7 1.1. Introduction ............................................................................................................................... 8 1.2. Climate change: impacts and options ....................................................................................... 8
1.2.1. Managing the diverse effects of climate change ............................................................................... 8 1.2.2. Post-Kyoto options ............................................................................................................................ 9 1.2.2.1. Defining a framework for emission credit trading ................................................................... 9 1.2.2.2. Carbon sequestration and sustainable forestry ....................................................................... 10 1.2.2.3. Differing views on the future of nuclear energy .................................................................... 11

1.3. Lessons from environmental disasters .................................................................................... 11

1.3.1. El Nio and storms of 1998 ............................................................................................................. 12 1.3.2. The danger of fishery mismanagement ........................................................................................... 12 1.3.3. Disaster at Doana National Park .................................................................................................... 13

1.4. Public policy: the challenge of environmental accountability ................................................ 13

1.4.1. Redefining the role of subsidies ...................................................................................................... 14 1.4.2. Traffic management ......................................................................................................................... 14 1.4.3. Stimulating recycling ....................................................................................................................... 15 1.4.4. Environmental management systems in the public sector ............................................................... 15

1.5. Conclusion............................................................................................................................... 16 2. EMPLOYMENT AND TECHNOLOGY: RESULTS OF RECENT ECONOMETRIC RESEARCH ....................................... 19 2.1. Introduction ............................................................................................................................. 20 2.2. Linking causes and effects ....................................................................................................... 21 2.3. Technology and employment in manufacturing ...................................................................... 22
2.3.1. Productivity ..................................................................................................................................... 22 2.3.2. Technology and growth ................................................................................................................... 23 2.3.3. Innovation and employment ............................................................................................................ 24

2.4. Technology and human resources ........................................................................................... 25

2.4.1. Crowding out ................................................................................................................................... 27

2.5. Information and communications technologies create jobs in the service sector................... 27
2.5.1. Organising production and distribution ........................................................................................... 28

2.6. Conclusion............................................................................................................................... 30 3. THE INFORMATION SOCIETY: SEEKING BENEFITS AND REDUCING RISKS ....................................................... 33 3.1. Introduction ............................................................................................................................. 34 3.2. Liberalisation and convergence .............................................................................................. 34 3.3. The cost and extent of Internet penetration............................................................................. 36 3.4. Charting the first hesitant steps of electronic commerce ........................................................ 38 3.5. Prospects for electronic commerce in Europe ......................................................................... 38 3.6. Economic impacts of electronic commerce ............................................................................. 39 3.7. International Internet initiatives ............................................................................................. 41 3.8. Networking at home and in the workplace .............................................................................. 42 3.9. The bite of the millennium bug ................................................................................................ 43

3.10. Closing the gates of innovation ............................................................................................. 44 3.11. Conclusion ............................................................................................................................. 45 4. VEHICLE MANUFACTURING: THE RACE FOR NEW CONCEPTS ...................................................................... 49 4.1. Introduction ............................................................................................................................. 50 4.2. Year of giant mergers and acquisitions ................................................................................... 51 4.3. New concepts for outsourcing and lean management ............................................................. 52 4.4. Fuel cells ................................................................................................................................. 53 4.5. Hybrid vehicles........................................................................................................................ 54 4.6. Towards intelligent traffic services ......................................................................................... 55 4.7. Regulating vehicle technology ................................................................................................ 56 4.8. Conclusion............................................................................................................................... 57 5. BIOTECHNOLOGY: THE NEXT WAVE ........................................................................................................ 61 5.1. Introduction ............................................................................................................................. 62 5.2. The race for the genome of the human race ............................................................................ 62
5.2.1. Costs and goals ................................................................................................................................ 62 5.2.2. Rush for intellectual property in genes ............................................................................................ 62 5.2.3. Benefits and risks ............................................................................................................................ 63 5.2.4. Bioinformatics ................................................................................................................................. 64

5.3. Antibiotics and resistance genes ............................................................................................. 65

5.3.1. European action urged ..................................................................................................................... 65 5.3.2. Seeds of resistance ........................................................................................................................... 66

5.4. Emerging markets in agribusiness .......................................................................................... 66

5.4.1. A difference in scales ....................................................................................................................... 66 5.4.2. Competing giants ............................................................................................................................. 67

5.5. Conclusion............................................................................................................................... 67 PART III: RTD IN SEVERAL NON-EU COUNTRIES ..................................................................... 71 1. THE UNITED STATES: RENEWED EXPANSION OF RESEARCH EFFORTS .......................................................... 71 1.1. Introduction ............................................................................................................................. 71 1.2. Prowess in science and technology ......................................................................................... 71 1.3. The growing importance of non-manufacturing sectors ......................................................... 72 1.4. Risks to privacy ....................................................................................................................... 74 1.5. Conclusion............................................................................................................................... 75 2. JAPAN : A TURNING POINT FOR THE RESEARCH SYSTEM ............................................................................. 77 2.1. Introduction ............................................................................................................................. 77 2.2. New strengths in basic research .............................................................................................. 77 2.3. Pressing weaknesses and concerns ......................................................................................... 78 2.4. Conclusion............................................................................................................................... 79 3. CHINA: A NATIONAL INNOVATION SYSTEM IN THE PROCESS OF FORMATION ................................................. 81 3.1. Introduction ............................................................................................................................. 81 3.2. A new national system in formation ........................................................................................ 81 3.3. Progress in information technology and telecommunications ................................................ 83 3.4. Two major problems: corporate RTD and venture capital ..................................................... 84 3.5. Conclusion............................................................................................................................... 84 4. R USSIA: LAYING NEW FOUNDATIONS FOR RESEARCH AND INNOVATION ....................................................... 87 4.1. Introduction ............................................................................................................................. 87 4.2. Research expenditure decimated ............................................................................................. 88 4.3. Number of research staff halved ............................................................................................. 89 4.4. Areas of excellence remain ...................................................................................................... 90 4.5. Renovation of the research infrastructure ............................................................................... 91 4.6. Some signs of improvement in the innovation climate ............................................................ 93 4.7. Setting goals for Russian research .......................................................................................... 94 4.8. International cooperation intensifies ...................................................................................... 95 4.9. Conclusion............................................................................................................................... 97 ADDRESSES OF CONTRIBUTORS ....................................................................................................................... 99

ABOUT THE IPTS-ESTO TECHNO-ECONOMIC ANALYSIS REPORT

Prospective techno-economic analysis (PTA) work at the Institute for Prospective Technological Studies (IPTS) consists in exploiting our contact with the R & D community at large on the one hand, the European Union (EU) policy-makers on the other, and our own hands-on involvement with science and technology (S & T) to underline and signal, hopefully in a user-friendly fashion, S & T-related policy-relevant developments and their implications, for the socio-economic context. The challenge is to try to identify the PTA information of special interest to EU policymakers, omitting the scientific discoveries with only marginal policy interest, and selecting those developments with great potential interest. We attempt to emphasise the links in both directions between technology and the economic environment, while addressing the policy-makers perspective. IPTS products are created with policy concerns in mind. In terms of frequency of publication, they range from spontaneous, quick-response very brief executive notes, to the monthly IPTS Report, whose articles examine underappreciated aspects of issues which are projected to be important, to the present, yearly volume which occupies the other end of the spectrum. This annual techno-economic report sets itself apart in that its organising principle is not a specific topic, as in the IPTS Report articles or the executive notes, but rather a time period. It is neither a compendium nor an almanac. It is an attempt at putting the events which have occurred in the course of the year into a perspective, highlighting their mutual links and potential implications. To what extent this ambitious objective has been met is up to the reader to judge.

Part I: Executive summary

Jorma Lievonen In association with the Group for Technology Studies (VTT)

1. Introduction
Part I of this report presents contextual observations of the year 1998 and some of the main topics of the report. Developments and trends in some individual fields are reviewed in greater detail in Part II. Finally, Part III takes a look at research and technological development (RTD) efforts and policies of four non-EU countries.

2. Contextual observations
In 1998, economic growth continued at a fast rate in the United States, while a financial crisis erupted in South-East Asia and Japan. In Europe, steady progress towards a common currency was achieved in the 11 Member States that were to form the euro currency zone. The effects of the Asian crisis were felt all over the world and may yet come to haunt European economies in the coming years as the recovered Asian exporters will take full advantage of their devalued currencies and restructured industries. The year 1998 abounded with instances of economic success based on new applications of technology. The United States continued to reap the benefits of information technology, while Europe had great success in some areas of telecommunications and pharmaceuticals. In Europe, unemployment remained at a level which continued to cause concern, while in the United States the numbers of jobless declined as employment in the service sector for the first time exceeded 100 million (Bureau of Labour Statistics 1998). It seems that services have become the main source of new jobs, while a large part of European RTD initiatives still target manufacturing industries. In 1998, rapid advances in information technology dominated events on the technological front. The negative side of the growing maturity of information technology was revealed as both of the companies which have built the dominant Microsoft-Intel platform were scrutinised by the United States Government for possible violations of fair competitive practices. Intels share of the microprocessor market declined towards the end of the year as a rival, Advanced Micro Devices, was able to offer less expensive products. In computer operating systems, Microsoft was being challenged on two fronts. A free operating system, Linux, originating in Europe but developed in international non-profit-making cooperation, became accepted as the most credible alternative to Microsoft NT (to be known as Windows 2000). In operating systems for small portable devices, the challenge also came from Europe. In 1998, it was announced that Symbian, a European-led consortium co-founded by Psion, Ericsson, and Nokia and later joined by Motorola, will try to develop a rival system to Microsoft CE.

In 1998, the next technological revolution, based on biotechnology, seemed to be gathering strength at a surprising speed. Important advances were reported in DNA chip and DNA vaccine development. DNA chips of the future may contain thousands of known sequences of DNA nucleotides determining accurately whether a sample contains pathogens or genetic defects. DNA vaccines will be used to express an antigen to which the body then becomes resistant. Both of these technologies remained at an experimental stage in 1998, but in the future they will probably offer extraordinary technological and commercial opportunities. The potential of DNA chips is in the diagnosis of diseases and hereditary conditions, while DNA vaccines may be used in immunisation against pathogen-borne diseases and also in treating some forms of cancer. In basic research, the well-established theories of physics were challenged by two sets of surprising observations. One seemed to indicate that neutrino has mass, which goes against the standard model of quantum physics. The discovery was announced as a result of 4 700 observations collected over 537 days in a massive underground facility in Japan (Fukuda et al. 1998). The other surprising discovery suggested that the expansion of the universe is not slowing down but may even be accelerating (Riess et al. 1998). The announcement was based on a few dozen measured supernova explosions in very distant galaxies. The measurements were carried out in cooperation between several observatories and indicated that the light coming from these supernovae is about 25 % dimmer than it should be. This means that the galaxies are further away than suggested by the established theory. Some concern still remains about the interpretation of the measurements, but if vindicated in the future, both of these surprise observations may offer scientists a chance to look again at ways to link phenomena of quantum physics with gravitation as it is now dealt with in general relativity. The results of these studies may once again redefine the basic concepts of physics.

3. Highlights of the report

The warming of the global climate is one of the topics discussed in the chapter on the environment in this report. The year 1998 started hot: each of the first five months was warmer than the previous global record for the month. Thus, it is not surprising that global surface temperatures for the whole of 1998 set a new record according to the measurements made by the National Aeronautics and Space Administration (NASA). Along with accumulating levels of greenhouse gases in the atmosphere, the warmth of 1998 was also enhanced by a strong El Nio which raised air temperatures on the eastern Pacific Ocean and was associated with one of the worst storms on record to hit Central America. On the basis of the chapter on technology and employment, a crucial future task for European RTD decision-makers is to target the employment-creating potential of the service sector. Service industries can be expected to provide a great number of jobs both in highlypaid expert occupations and in jobs that require less educated workers. The success of many companies and countries will depend on their ability to create service innovations, exploiting opportunities created by the Internet and other applications of information technologies. The chapter reveals new insights that have been gained as a result of painstaking econometrical studies elucidating the impact of new technologies on employment. 4

The chapter on the information society shows how measures for deregulation and increased competition in telecommunications have affected telecommunications costs. Lower telephone call charges tend to further the adoption of the Internet and may accelerate the realisation of new electronic commerce (e-commerce) services. Other factors also influence the rate at which the Internet penetrates homes, and it may be that in some cases the use of the Internet in schools is an important factor in prompting parents to invest in the new technology. In the banking and energy sectors, 1998 was a year of mergers and acquisitions, and that was also the case in the automotive industry. The chapter on vehicle manufacturing points out that one of the greatest challenges in the field is to commercialise successfully lowpollution technologies that are gradually emerging in research and technological development. A breakthrough could be achieved by one of the large car manufacturers, but it is also possible that the market for low-emission cars will be created by companies that now manufacture delivery or leisure vehicles. While the chapter on vehicle manufacturing pays attention to electric and hybrid propulsion technologies, it has to be kept in mind that natural gas is also a possible fuel of the future. Infrastructure built for the distribution of natural gas could be used later as a model or a component of gas networks that may be required by an eventual hydrogen economy of a distant future. The chapter on biotechnology shows how the rush for the human genome is accelerating not only the development of new medical technologies but also efforts to secure patents and commercial rights for various applications. While gene technology creates opportunities for new products and services, the growing numbers of multi-drug-resistant bacteria threaten to erode the results of decades of research on antibiotics. It remains to be seen whether more effective regulation of the use of antibiotics is required in the future. In 1998, some steps were taken to refine rules on the application of biotechnology in some areas of the economy such as food products and agriculture. In Part III, the chapter on the United States praises the countrys scientific and technological prowess but also raises concern about issues related to the privacy of individuals and families. The chapter on Japan takes the view that the economic crisis is of a passing nature and lists some of the new achievements of the country in basic research. In China, the birth process of a new national system of innovation can be observed, and there are already signs of the awakening scientific and technological capabilities of that country. The chapter on Russia tells a story of a gradually recovering national innovation system that has gone through an economic collapse, as well as extensive reorganisation, and has still to face a great number of challenges. Yet this country, like so many others, puts the emphasis on science and technology as a foundation of future well-being.

4. Conclusion
Events of the year 1998 demonstrate how science and technology are permeating all aspects of life in industrial societies. The reason is not that there is a technological conspiracy to drive out human values or to wipe out the last remaining pockets of wilderness, but that despite all its failings the process of science remains the best means of getting closer to the truth and arriving at the heart of things. What technology does is to offer the most 5

efficient solutions for particular tasks. It remains for the human decision-maker to set the goals and select the tasks.

References
Bureau of Labour Statistics. 1998. Employment situation, May (URL: ftp://ftp.bls.gov/pub/news.release/History/empsit.060598.news). See also, Baker, G. 1998. US jobs data show rise in employment, Financial Times, 6 June. Fukuda, Y. et al. 1998. Evidence for oscillation of atmospheric neutrinos The Super-Kamiokande collaboration, Phys. Rev. Lett., 81, pp. 1562-1567 (URL: http:// www-sk.icrr.u-tokyo.ac.jp/doc/sk/pub/). See also, Gibbs, W. W., A massive discovery, Scientific American, 279 (2), August. Riess, A. G., Filipenko, A. V., Challis, P., Chlocchiattia, A., Diercks, A., Garnavich, P. M., Gilliland, R. L., Hogan, C. J., Jha, S., Kirschner, R. P., Leibundgut, B., Phillips, M. M., Reiss, D., Schmidt, B. P., Schommer, R. A., Smith, R. C., Spyromilio, J., Stubbs, C., Suntzeff, N. B. and Tonry, J. 1998. Observational evidence from supernovae for an accelerating universe and a cosmological constant, Astronomical Journal, 116 (3), September, pp. 1009-1038 (URL: http://xxx.lanl.gov/abs/astro-ph/9805201). See also, Hogan, C. J., Kirschner, R. P. and Suntzeff, N. B. 1999. Surveying space-time with supernovae, Scientific American, 280 (1), August, pp. 28-33.

Part II: Techno-economic developments 1. The environment: the ultimate challenge for public policy and private management
Celia Greaves and Tonino Amorelli Centre for Exploitation of Science and Technology (CEST)

Summary
Analysis of topical events in 1998 confirms that environmental issues can be expected to increasingly occupy RTD decision-makers in the future. In 1998, there were four main areas which raised particular attention: Climate change: new evidence of effects on biodiversity and health; Post-Kyoto options: emission credit trading, carbon sequestration and nuclear energy; Environmental disasters: lessons for the future; and Public policy: misplaced government subsidies, recycling, traffic management, and environmental management systems.

Evaluation of developments in these areas points to a need for sophisticated, accurate, and reliable estimates of global and European environmental and ecological changes. While building on continuing efforts to establish appropriate regulatory strategies and frameworks, there is still scope for greater flexibility in the search for global consensus. The ability to link RTD, strategic goals and practical policies will be critical for long-term success.

1.1. Introduction
In all fields of product and technology development, environmental factors are an important consideration. In fields such as energy technology and transport, the outcome of RTD efforts has a huge potential impact on the quality of the environment. In many other fields, ranging from packaging to computers, the degree of success in ensuring the environmental safety of products shows what a difference there is between companies that just manage to put together products and companies which are able to respond to the needs of society and various segments of consumers. Similarly, in the management of RTD efforts and in the definition of RTD policies, advances along the environmental dimension are a measure of the agility of the decision-makers. Events of 1998 demonstrated the challenges which environmental issues pose to those with the means and abilities to develop new solutions.

1.2. Climate change: impacts and options

The debate on the causes and extent of the global warming continues and finding solutions requires further research efforts. Research findings in 1998 highlighted the importance of identifying and analysing potential impacts of the climate change on the global ecosystem. Research action is required at local as well as global level. Changes affecting water resources, wildlife, agriculture, forestry and coastal zones could lead to major economic and social repercussions. It is important to ensure that the EU Member States are prepared for all reasonable eventualities. The year 1997 was the warmest in the global statistics going back to 1860, but 1998 was to set a new record. Each of the first eight months of 1998 was the warmest month on record, or equalled the previous highest temperature level for the month. (Meteorological Office 1998). During the year, one of the few findings to raise some hope was the discovery that global emissions of methane, a potent greenhouse gas, may be abating (Schneider 1998). Over the last 100 years, global temperatures have risen by about 0.6 C, while in Europe average temperatures have risen by 0.8 C. In 1998, it was recognised that even if greenhouse gas emissions were stabilised at the 1990 level, climate change would still be inevitable in the future (The Economist 1998a). If full prevention of global warming is no longer a viable option, research on possible adaptation strategies will be necessary to create the knowledge base required for future regulation and policy-making.

1.2.1. Managing the diverse effects of climate change Recent studies indicate that the change in climate could create new, previously unrecognised problems for both health and biodiversity in Europe. In the future, parts of Europe could host not only species but also diseases that have migrated from the south. One study published in 1998 confirmed that a warmer climate could initiate the migration of different species from their traditional habitats (Holmes 1998a). It was 8

suggested that such movements could pose a threat to biodiversity, and the issue merits further study. As mosquitoes, ticks, and rodents take advantage of warmer conditions and migrate to higher altitudes and more northern latitudes, some diseases affecting humans may be spread in the process (Pearce 1998a). The main threat is the spread of diseases transmitted by mosquitoes. Malaria and dengue fever could spread from warm lowland areas of Africa and South America to higher altitudes. An expert group of the World Health Organisation (WHO)/European Centre for Environment and Health (ECHE) has suggested that recently observed changes in mean temperatures make it possible that in the future some climaterelated health problems may also arise in Europe (WHO/ECHE 1998). However, malaria is unlikely to be reintroduced into developed countries if adequate surveillance and control programmes are maintained (Meteorological Office 1998).

1.2.2. Post-Kyoto options In the aftermath of the December 1997 Kyoto protocol, some of the familiar energy policy and RTD options are receiving renewed attention. Alternative sources of clean energy, new frameworks for controlling emissions, and new methods of recognising the impacts of climate change are urgently required. At the practical level, the interests of nations differ, and there is the consequent danger of inertia. But all nations in the industrialised north and in the developing south would benefit from new technological options. In November 1998, delegates from more than 170 nations agreed in Buenos Aires to set the year 2000 as the deadline for developing methods to oversee international greenhouse gas reductions. The conference also set a timetable for gradual implementation of the 5 % cut in greenhouse gas emissions which was agreed in Kyoto. Agreement was also reached on a framework for technology transfer and investment from the industrialised world to the south. Countries vulnerable to the impacts of climate change will receive support from the Global Environment Facility for planning concrete measures for adaptation. Three policy options have received particular attention after the Kyoto meeting: international trade in emission credits; the use of forests as carbon sinks; and nuclear energy.

1.2.2.1. Defining a framework for emission credit trading Implementing the Kyoto protocol could be expensive. An OECD study suggested that simply maintaining CO2 emissions at current levels could cost up to 2 % of global gross domestic product (GDP). Inaction now could increase this amount threefold by the year 2050. In comparison, a study by the World Watch Institute concluded that the effect of greenhouse gas abatement policies would range from 2.4 to + 2.4 % of GDP, as economic benefits involved in efficiency gains should be accounted for as well (Nature 1998a). In the United States, an independent economic forecasting body estimated that implementing the Kyoto protocol would cost the United States 2.4 million jobs and reduce GDP by up to EUR 275 billion annually (Suzman 1998).

The provisions of the Kyoto protocol include mechanisms which could reduce the costs of emission abatement measures. These include joint implementation and clean development, but the means of monitoring, verification and accreditation are not provided. Emission trading is a cost-reducing mechanism allowed by the Kyoto protocol, but it has not been tested in an international context. In the United States, there have been six major applications of market-based emission-control instruments. The most important of these, a sulphur dioxide allowance system, is reported to have resulted in considerable financial savings while achieving some of its main environmental goals. A robust firm-to-firm permit market has consequently evolved (Svendsen 1998). In 1998, the International Petroleum Exchange (IPE) proposed the creation of a market for trading carbon emission credits. Under the scheme, governments would introduce emission allocations which would then be traded on monitored free markets. This process is seen to be a cost-effective and flexible way of reducing pollution, allowing companies to sell their unused emission credits. Over time, the total volume of credits would be decreased to achieve emission reduction targets (Malkani 1998). In a similar fashion, BPAmoco, the oil multinational, has started to develop an internal trading system for emissions, although questions have been raised about the validity of this instrument and its socio-economic impact. At the global level, the United Nations Conference on Trade and Development (Unctad), the United Nations Environment Programme (UNEP) and the Earth Council have defined principles by which emissions could be traded (Environmental Business 1998). While some of the emission trading initiatives have widespread support from industry, some environmentalists believe that credit trading could be used as a substitute for concrete action to combat rising emissions. At government level, during G8 discussions in London, the EU Member States expressed their concern that the United States could avoid undertaking the bulk of its reductions by buying emission credits from less developed nations (Nature 1998b). Similar concerns were raised during the meeting of the EU Environment Council in June 1998. These events seem to suggest that if there is to be a framework for trading emission credits, then there has to be an international consensus on how it is to be operated and regulated. Reliable research-based assessments are required to clarify how such a system will deliver clear, cost-effective benefits for the environment. Emission trading should not be an instrument which could be used by the developed nations to avoid reducing their own emissions.

1.2.2.2. Carbon sequestration and sustainable forestry In 1998, the EU Euroflux programme reported that Europes forests are absorbing a significant proportion (up to 33 %) of European CO2 emissions (Pearce 1998b). The study, which examined forests across Europe, may have important consequences for calculating overall CO2 emissions. The study constitutes a step towards a reliable nationwide emission inventory method. American scientists have shown their interest in the method, and a corresponding project, called Ameriflux, has been launched.

10

While some parts of the world continue to deplete their forests, recent efforts by foresters in Europe have proved timely. However, it is also important to consider the possible enduses of such forestation to assess the true net gains. Construction timber can hold carbon for centuries, while wood for paper releases it over a few years (Energy & Environment Manager 1998). There is need for further research to clarify the situation. In any case, efforts to sequester carbon in forests may have a double dividend as they also foster sustainable forest management practices (Brning 1998).

1.2.2.3. Differing views on the future of nuclear energy As industrialised nations have analysed the outcomes of the Kyoto protocol and have discovered that there are few easy options for achieving emission targets, there have been calls for increasing the use of nuclear energy. In 1998, the most important proposal came from Japan. Starting from the 1990 levels, the country is committed to reducing greenhouse gas emissions by 6 % between the years 2008 and 2012. A Japanese task force on global warming put forward a plan to increase nuclear energy production by 50 %. According to the Ministry of Trade and Industry (MITI), this would mean 20 new nuclear reactors (Saeko 1998). Along similar lines, Finlands Finance Minister said that for his country nuclear energy could be one of the few available means of achieving the Kyoto emission targets (Pearce 1998c). A report by researchers in Germany showed that significant amounts of CO2 are emitted during the processing of uranium ore, but these represent only a fraction of those arising from corresponding amounts of energy produced in coal-fired plants (Edwards 1998). Overall, it has been estimated that nuclear power is contributing to an 8 % CO2 global emission reduction annually, and so it could be concluded that nuclear energy is a realistic method for reducing emissions from the energy sector. However, there is still a great deal of concern about the cost-effectiveness of the nuclear solution, reactor safety, and the disposal and reprocessing of nuclear waste. In 1998, the new German Government was planning to close all of its nuclear power plants and intended to start this action soon. The European Commission stated that, although it could not dissuade EU Member States from considering nuclear energy, it would encourage them to pursue renewable sources such as wind, wave and solar (IEAE 1998). Trials of renewable energy production, including those of BP Solar in Germany, are continuing in many parts of Europe. The pilot schemes are generally taking place on a small scale. All in all, energy technologies and policies can be expected to remain high on the RTD agenda. There is a need to assess both the feasibility of renewable energy sources and the potential for improving the efficiency of coal-based energy production methods.

1.3. Lessons from environmental disasters

During 1998, a number of environmental catastrophes devastated densely populated regions across the world. Some of the tropical storms of the year were probably related to El Nio. There were also environmental disasters caused directly by human activity. 11

1.3.1. El Nio and storms of 1998 The El Nio of 1997-98 was the most extreme on record. Its impacts illustrated human vulnerability to climate change. The drought associated with it made forest fires worse in Sumatra and Kalimantan in Indonesia, although many of the fires were said to have been lit by local farmers clearing land for agricultural use and forestry purposes. Fires also raged uncontrollably in the Khao Yai National Park in Thailand, in the northern Amazon in Brazil, and throughout Central America (The Economist 1998b). El Nio brought torrential rains to Peru and East Africa. The economic, social and political costs of El Nio are difficult to estimate. In many instances, the direct and indirect impacts will take years to assess and overcome. Smoke billowing from forest fires in Indonesia drifted over many large cities, seriously damaging the health of inhabitants. In Singapore, it was estimated that, in addition to costs already incurred, there could also be future losses amounting to EUR 0.8 billion due to adverse effects on tourism (New Scientist 1998). The impact on ecosystems is yet to be determined. Three areas in China suffered from massive flooding during the summer of 1998. Thousands of people died and 14 million people were left homeless. Altogether, 240 million people were affected by the disaster, which prompted the government to increase efforts to replant forests to previously cleared highland areas. Hurricane Mitch, which hit Central America between 26 October and 4 November 1998, proved to be the most vicious in the Caribbean since 1780. The hurricane killed at least 11 000 people and left three million people homeless (NOAA 1998). In Nicaragua and Honduras, economic development was set back, and some EU Member States annulled debts owed by these countries.

1.3.2. The danger of fishery mismanagement The year 1998 was declared International Year of the Ocean by the United Nations, but continuing evidence emerged throughout the year of the problems facing marine ecosystems (Carr 1998). As the human population grows and as the demand for fish proteins increases, the fish stocks may become depleted to such an extent that their numbers will recover only with great difficulty. A report by the International Centre for Living Aquatic Resources Management (Iclarm) described how overfishing is destroying marine environments (Holmes 1998b). It was estimated that 25 to 35 % of the output from the richest areas of the sea is harvested at the moment. One damaging aspect of overfishing is the destruction of the natural marine food chain. This results in the fish catches containing fewer large predators and more of those smaller species which are lower down the food chain (Pauly et al. 1998). The United States has announced a plan to invest a proposed EUR 200 million over five years to protect marine resources (Reichardt 1998). The main part of the sum, EUR 180 million, will support a five-year programme of rebuilding and sustaining marine fisheries, and providing research vessels to monitor progress. The remainder is to go to other marine research projects. The announcement received mixed responses from the research community because there had been little expert consultation in the identification of priorities.

12

In Europe, plans have been put forward to pool marine research efforts across France, Germany and the United Kingdom. The combined marine research budgets of these countries would exceed EUR 600 million per year (Butler 1998). The plan coincided with another initiative to develop a European Maritime Agency. At present, the complexities of ocean ecosystems are not well understood. For this reason, it has been difficult to identify the causes that lie behind the destruction of some of the worlds most important coral reefs. The importance of ocean studies is underlined by the fact that sea-related industries employ about 200 million people throughout the world. Research on ocean ecosystems as well as the development of survival strategies for communities based on fishing are required to ensure that fish stocks will not be irrevocably depleted.

1.3.3. Disaster at Doana National Park In April 1998, in southern Spain near the city of Seville, the catastrophic collapse of a dam containing mining sludge flooded 2 000 ha of land with a cocktail of heavy metals (McKenzie 1998). The condition of the dam, which was owned by the Swedish-Canadian Boliden company, was already under suspicion, with court cases pending since 1995. The lack of action proved disastrous. There were fears that wildlife in the nearby Doana National Park would be seriously affected by the disaster. Each year, millions of migratory birds, including flamingos, visit the park. The reserve is also one of the few places in Europe where the Iberian lynx still survives in a natural state; the size of the population is only about 500 (Bergman 1998). Large numbers of dead fish were the first indication of damage to the ecosystem. The incomes of local tomato, olive, citrus and cotton farmers will be affected for many years. The event demonstrated the importance of mapping out the risks associated with major industrial operations which involve high volumes of toxic waste. Moreover, there is a need to develop an improved understanding of the socio-economic environments in which large-scale industrial operations are carried out. The employment situation in the region around Doana is poor and delicately balanced between mining, agriculture and tourism occupations. To environmentalists, the disaster brought into question the worth of highprofile environmental initiatives by industry across Europe.

1.4. Public policy: the challenge of environmental accountability

Public bodies across Europe face potentially conflicting demands for improving the business environment and protecting the natural environment. Some events during 1998 illustrated the tensions which have arisen between various policy goals in Europe. These tensions offer interesting targets for future studies on the reasons for and extent of apparent and real contradictions in public policy goals.

13

1.4.1. Redefining the role of subsidies Sometimes governments spend large amounts of money to support environmentally damaging activities, and subsequently face high costs arising from the remediation of the damages. Furthermore, a recent OECD report found that some subsidy schemes run counter to nationally or internationally agreed environmental objectives (OECD 1998a). According to the OECD report, misplaced subsidies tend to be concentrated in five key sectors: agriculture; fossil fuels and nuclear energy; road transport; the water industry; and fisheries. As an example, road transport subsidies promote pollution at local, regional and national levels, and subsidies of fossil fuels aggravate acid rain, smog and global warming. In the United States, where oil exploration has been subsidised by tax credits and where energy taxes are low, petrol is now cheaper than bottled water. In Germany, annual subsidies provided to the mining sector amount to EUR 5.6 billion per year, and it might be argued that it would be more economical to close the mines and discharge employees on full pay rather than to continue maintaining this level of support. At the European level, the common agricultural policy and the Structural Funds would provide interesting topics for analysis. The impacts of environmentally harmful subsidies may be widespread, encompassing higher taxes and prices in unsubsidised sectors, as well as aggravating government deficits, diverting government funds from more worthwhile uses and distorting private investment decisions. On the positive side, subsidies may help to overcome deficiencies in the market mechanism and provide support for disadvantaged sectors of the economy and sections of society. Future research should focus on the institutional barriers preventing the modification or abolition of the existing schemes.

1.4.2. Traffic management Following the air pollution incidents in Paris during 1997, a new green disk (pastille verte) system was introduced in August 1998 as a means of limiting vehicle access to the city centre (The Economist 1998c). The system operates once pollution exceeds a certain level. Cars are banned on alternate days on the basis of their number plates. Low-emission vehicles, as certified by the pastille verte, are exempt from the ban, as is customary in other European initiatives promoting alternative technologies. The Paris initiative and similar activities in Germany illustrate an increased willingness to devise traffic management practices in the interests of air quality. In trial events, 14 Italian and 35 French cities banned car traffic from city centres for one day in 1998 (Green Futures 1998). Looking ahead, there is a need to provide mechanisms to allow policy-making at the local level to build on and learn from experiences gained elsewhere so that the mistakes of the past are not repeated and good practice is extended. Such mechanisms have to recognise and take into account specific local circumstances and broad strategies. At the European level, emphasis will need to be placed on providing sufficiently flexible, yet robust, frameworks to allow the development of specific combinations of actions to meet local

14

needs. While several RTD actions support the development of new environmentally friendly technologies, there may be merit in considering whether there is scope to study the opportunities offered by new environmental management practices.

1.4.3. Stimulating recycling EU initiatives aimed at stimulating recycling appear to be making positive inroads into a variety of sectors. The first draft of a proposed EU directive on waste electrical and electronic equipment, published in April 1998, gives the producers a clear responsibility for both collection and recycling. The draft encourages the incorporation of recycled components and materials into new products (ENDS 1998a). Parts of industry are already taking a proactive approach to the recycling challenge, with international companies such as IBM Japan establishing a take-back programme, and Mannu UK and sister companies planning to reprocess up to 150 000 tonnes of waste annually across Europe (Cooke 1998). European legislation to stimulate the recovery and reuse of packaging materials is already in place, and there is some evidence that developers of technology are responding to the challenge. In the UK, a food packaging company and coatings manufacturer has developed a board with a water-based coating. The board can be used to package ready meals and it is claimed that, unlike boards coated with wax and plastic, the new form of packaging can be readily recycled using conventional paper recycling technology (ENDS 1998b). A European study showed that plastics recycling is set to become increasingly feasible on both environmental and financial grounds (ENDS 1998c). The study suggested that the rate of plastics recycling could quadruple over the next 10 years from its current rate of 9 % up to 36 %, with profitability also increasing. In the long term, the cost gap between recycling and energy recovery should narrow. The results of some of the studies carried out so far highlight the role of carefully crafted regulation in stimulating innovation and technological progress. There may be scope for tightening targets progressively as the market responds. Additional research is required at various stages of planning, implementing and reviewing regulation. Account should be taken not only of explicit costs and benefits but also of the technological responses and their possible impacts.

1.4.4. Environmental management systems in the public sector European regulations promoting the voluntary uptake of environmental management systems (EMS) at the company level have been in force since April 1995. With over 1 300 companies across Europe registered under the legislation, interest is now being focused on how such approaches can improve the environmental performance of the public sector. In January 1998, the OECD held a workshop on EMS for government agencies (OECD 1998b). The workshop acknowledged the value of EMS in elevating environmental issues into routine management concerns. A number of aspects of particular relevance to the public sector were explored, including barriers to EMS application (such as low accountability, the absence of champions, and the culture of risk aversion).

15

The workshop identified a number of examples of cost-benefit analysis which revealed the value of EMS, and produced several recommendations on issues such as management incentives and staff training. It was concluded that in this area governments need to recognise the potential for action sooner rather than later. It is more a question of how to move forward rather than whether or not to. There is a need for support and guidance at the European level, and, consequently, for research to clarify the issues, benefits and costs.

1.5. Conclusion
One theme which arises from the events in 1998 is that there is a need for deeper environmental analyses of regulatory, public policy, and business management practices. It is also evident that increasingly sophisticated technological and scientific methods are required for defining the extent of environmental changes and possibilities for their remediation. More research emphasis should be laid on ecological management practices and procedures used for environmental decision-making, including institutional adjustment. The aim and challenge are to arrive at policies which will allow at the same time the continuation of economic growth and the preservation of the European environment.

References
Bergman, C. 1998. The almost-missing lynx, Natural History, 107 (8), pp 38-46. Brning, C. 1998. Enhancement of terrestrial carbon sink potential: A contribution to mitigate global warming?, IPTS Report, 28. Butler, D. 1998. Europe may pool marine research efforts, Nature, 392, 16 April, p. 637. Carr, E. 1998. A second fall, Financial Times, 9 May. Cooke, A. S. 1998. Point of no return for electronic waste, Tomorrow, January/February. Edwards, R. 1998. No smoke without, New Scientist, 12 September. ENDS. 1998a. New onus on producers of electrical waste directive, ENDS Report, 280, May. ENDS. 1998b. Easily recyclable packaging board developed for ready made meals, ENDS Report, 279, April. ENDS. 1998c. Fourfold rise in plastics recycling targeted in study for DG XI, ENDS Report, 279, April. Energy & Environment Manager. 1998. How trees are helping to save the world, November/December. 16

Environmental Business. 1998. Emission trading hotting up, 21 May. Green Futures. 1998. Getting there?, May/June. Holmes, B. 1998a. Unwelcome guests, New Scientist, 18 April. Holmes, B. 1998b. The rape of the sea, New Scientist, 14 February. IAEA. 1998. Bulletin, 39 (2), p. 34. Malkani, G. 1998. IPE calls for CO2 permit trading, Financial Times, 6 May. McKenzie, D. 1998. Doana damned, New Scientist, 2 May. Meteorological Office. 1998. Climate change and its impacts, United Kingdom, November, ISBN 0 86180 346 9. Nature. 1998a. OECD counts cost of CO2 emission controls, 393, 4 June. Nature. 1998b. G8 leaders pledge to sign Kyoto protocol on climate change, 393, 21 May. New Scientist. 1998. Asia burns again, 18 February. NOAA. 1998. Mitch: The deadliest Atlantic hurricane since 1780 (URL: http:// www.ncdc.noaa.gov/). OECD. 1998a. Improving the environment through reducing subsidies, OECD, Paris. OECD. 1998b. Report of the Workshop on Environmental Management Systems for Government Agencies (ENV/EPOC(98)11/final), OECD programme on sustainable production and consumption, Paris, January. Pauly, D., Christensen, V., Dalsgaard, J., Froese R. and Torres Jr, F. 1998. Fishing down marine food webs, Science, 279, 6 February, pp. 860-863. Pearce, F. 1998a. On the march, New Scientist, 18 April. Pearce, F. 1998b. Soaking it up, New Scientist, 3 October. Pearce, F. 1998c. Just hot air, New Scientist, 9 May. Reichardt, T. 1998. Clintons ocean agenda offers modest treasures for science, Nature, 393, 18 June. Saeko, A. 1998. Japan reacts uneasily to nuclear plan for meeting carbon cuts, Nature, 394, 2 July.

17

Schneider, D. 1998. Good news for the greenhouse, Scientific American, June, pp. 1213. Suzman, M. 1998. Greenhouse gases: Treaty will cost US dearly, Financial Times, 10 June. Svendsen, G. T. 1998. The US acid rain program: Design, performance, and assessment, Environment & Planning C: Government & Policy, 16 (6), pp. 723-735. The Economist. 1998a. A heated controversy, 16 August. The Economist. 1998b. The season of El Nio, 9 May. The Economist. 1998c. Banned cars, 25 September. WHO/ECHE. 1998. Early human health effects of climate change, WHO/ECHE, Rome Division, EURO International Workshop, 21 to 23 May.

18

2. Employment and technology: results of recent econometric research

Seppo Laaksonen Statistics Finland

Summary
Are new technologies a source of new jobs or a cause of job losses? As increasingly accurate company-level data have become available, new econometric studies have been carried out to resolve the effects of technology on employment. This chapter surveys the main results of studies carried out in the 1990s, but the emphasis is on recent research which utilises up-to-date data. The important question is whether or not the technology policies of industrial countries work against the employment policies in these countries. There are arguments that support the optimists, who believe that in the long run investments in new technology tend to create more jobs than they displace, while a strong case can also be presented by the pessimists, who fear that each recession results in higher unemployment rates than the previous one, and that the real culprit is technology. As a result of recent econometric studies, more decisive answers can be given to these questions than ever before.

19

2.1. Introduction
Technology and employment is an old topic. For classical economists such as Adam Smith and David Ricardo, capital accumulation was a key factor determining the rate of economic growth. Later Joseph A. Schumpeter (1942) argued that innovation is the main driving force behind long-term waves of economic growth. He introduced the term creative destruction for industries which are characterised by wide innovative opportunities and are introducing new improved products. Enterprises relying on old machinery will perish while firms which use modern equipment are more likely to prevail. Classical economists described market mechanisms which operate in a capitalist economy reabsorbing workers who may have been dismissed by the direct labour-saving effect of technical change. Optimists stressed compensatory forces and new employment opportunities opened by product innovations. Pessimists underlined market failures which can limit re-employment prospects. Here we cannot summarise the debate that has been raging over the last few decades, but we want to refer to the productivity concept which has become extremely significant during this period. In the long run, productivity is almost everything (as Paul Krugman put it; see Brynjolfsson and Hitt 1998). Productivity determines our living standard and the wealth of nations, as the amount a nation can consume is ultimately tied closely to what it produces. By the same token, the success of a business vis--vis competitors generally depends on its ability to deliver more value without using more labour, capital or other inputs. Productivity is a simple concept. It is the amount of output produced per unit of input (labour productivity if only labour is considered, otherwise factor productivity). While it is easy to define, it is notoriously difficult to measure, especially in the modern economy. Where does productivity growth come from? By definition, not from working more, as in that case the increase in output would come from increased labour input. Similarly, adding capital or other factors of production may, but does not necessarily, increase productivity. Productivity growth comes from working more smartly. That means adopting new production technologies. The greatest increase in productivity has historically been associated with a particular class of technologies known as general-purpose technologies (Brynjolfsson and Hitt 1998). However, new general-purpose technologies as well as niche technologies require time for diffusion and organisational adaptation before potential benefits can be realised. It has been shown that major gains in productivity have not been seen in some cases until decades after a new technology was introduced. Major productivity gains at the national level may be realised only after the diffusion of new technologies reaches a critical mass (Kraemer and Dedrick 1998). The theme technology and employment has long been of particular interest for policymakers. A recent example is the European Commission White Paper on growth, competitiveness and employment published in 1994. It discusses the problem of technological unemployment but suggests that new individual or collective needs will 20

provide new job opportunities. As yet technical progress is presenting opportunities for growth and employment, on condition that we alter our development model, meet the needs stemming from the upheavals in social life and urban civilisation, preserve our rural areas, and improve the environment and the quality of our natural assets.

2.2. Linking causes and effects

The schematic presentation in Figure 1 illustrates our approach. Productivity in industry as well as the quality of products and services are influenced by such factors as infrastructures, investment in RTD, organisation practices in the workplace, and the level of education. Technology is seen as a driving force in improving productivity, but not independently of national infrastructure, workplace organisation and human capital. Figure 1: Key factors linking technology and employment

In econometric research technology is a manifold and complex concept. It is measured, for example, by RTD expenditures and investments in product or process innovations, as well as by the technological equipment of plants, firms or industries. Technologies or innovations may be developed by a firm itself, or they may be purchased from the market and then adopted as embodied technologies. Research shows that the adoption of new technology is also a demanding process. 21

For a long time, empirical econometric research has been based on industry-level data. Such studies are required in the future as well, but the approach does not yield detailed explanations of many fundamental questions, such as the impact of old or new technologies on demand for labour in firms and countries. That is why we shall highlight the results of studies based on micro-level business data. The collection of such data was started in many countries only about 10 years ago. Much more research is needed and we cannot yet say much about many interesting issues. Most research has utilised data on manufacturing enterprises, and hence the worst omissions concern the service sector and especially links between manufacturing and services. That is why it is difficult to analyse thoroughly the role of outsourcing, a phenomenon that has become common in recent years.

2.3. Technology and employment in manufacturing

It is generally known that during the last few decades agricultural and industrial employment has been decreasing, whereas employment in services has been increasing. The transition is often attributed to three different factors: (i) the pace of technological change in agriculture and in manufacturing has been faster than that in the services, reducing relative labour demand and employment in the goods-producing sectors; (ii) the demand for services has grown more rapidly than that for agricultural and industrial products; (iii) companies are using outsourcing and mainly industrial firms have transferred non-essential tasks to companies from the service sector.

2.3.1. Productivity The conventional wisdom is that rising productivity in the manufacturing sector of developed countries has been driven by downsizing, an apparently pervasive phenomenon during the last decade. Aggregate evidence clearly shows that the productivity increase has been accompanied by falling employment. However, some studies (e.g. Baily et al. 1994; Laaksonen and Teikari 1999) show that enterprises that have increased not only productivity but also employment have contributed almost as much to the overall productivity growth figures as plants that raised productivity at the expense of employment. Some plants increased productivity by cutting labour, while others managed to gain in productivity while adding jobs. Downsizing has not been a uniform global phenomenon, but it has been fairly widespread in manufacturing (Conference Board 1998). In the future, downsizing is likely to remain a key feature of the global economy as shortened product cycles and rapid institutional changes keep generating requirements for restructuring. While new resources can be allocated directly to uses in which they are most productive, downsizing is often necessary in reassigning existing assets. In the Netherlands, upsizers have accounted for one half of the aggregate productivity growth (Baily et al. 1994). The role of successful upsizers was also important in Finland (Laaksonen and Teikari 1999) even during the recession of the early 1990s. Often small and medium-sized enterprises (SMEs) performed as unsuccessful upsizers; that is, they tried to maintain employment despite a fall in productivity. 22

There are significant differences in productivity and employment performance between enterprises that carry out RTD and those that do not (Jarmin and Motohashi 1997). This was established in a recent comparative study on companies in the United States, France and Japan. Even within a single industry, there were differences between companies which were engaged in RTD and those which were not. Compared with non-RTD firms, those engaged in RTD had higher employment growth in France and Japan. As regards productivity growth, RTD firms excelled in France and in the United States. Furthermore, an analysis of upsizers and downsizers shows significant firm-level heterogeneity and confirms that RTD is an important factor in achieving both productivity and employment growth. The size of the firm is also important. The employment performance of SMEs can be quite different from larger firms, as the cases of France and the United States show. In contrast to the productivity premium observed with RTD firms in France and the United States, the effect of technology on productivity growth is not so clear in Japanese firms. Productivity growth at the firm level can be seen as influenced by the firms managerial capabilities, which are reflected in employment and capital investment.

2.3.2. Technology and growth Some researchers (e.g. Musick 1998) have called those enterprises which have increased their employment persistently over several years heroic. Some theoretical frameworks are available for the analysis of such companies. Jovanovic (1979) says that an establishment of a given age and size may grow faster than its true efficiency would warrant merely because it has fortuitously received a series of exceptionally favourable shocks. In individual cases, persistent growth over a period may not be related to the true quality of management or products, but rather to a sequence of random fortunate events. On the other hand, a good company using advanced technologies may be able to increase its market share and/or expand into new markets. One consideration is the possibility that, in addition to contributing directly to plant performance, advanced technology use may be a proxy for other, unmeasured characteristics which also contribute to growth. For instance, because advanced technology use is a demanding activity, it is undertaken most often by large and/or successful enterprises. A correlation between advanced technology use and plant performance may reflect such attributes as the quality of management and the skills of the workforce. In a Finnish study (Vainiomki and Laaksonen 1997), both job creation and destruction were observed to increase with the level of technology. The exception was the group of companies in which the level of technology was the lowest; in this group job destruction was disproportionately high. Only in companies in which the level of technology was the highest was a steady state of employment achieved in the long run. Regardless of technology level, the manufacturing sector was harder hit on average by the recession than the economy. However, in the high-technology group, job creation was reduced less than in other companies. Corresponding evidence was obtained in an EU innovation study (European Innovation Monitoring System EIMS- 1997): The likelihood of survival of a firm in a technology-based sector is more likely to be positive than negative.

23

A comparative study on British and Australian businesses (Blanchflower and Burgess 1996) shows that the introduction of new technology was more likely to be associated with job growth rather than job decline in both countries. The impact of new technology on job growth was roughly similar in these two countries at around 1.5 % per annum in Australia and 2.5 % in United Kingdom. New technology has a bigger impact on employment growth in larger workplaces. Job growth and the introduction of new technology appear to complement rather than substitute each other.

2.3.3. Innovation and employment There are two major types of innovation, that is, process and product innovations. In addition, we can speak of organisational innovations which are necessary for realising the companies potential for innovation, as an EU innovation study (EIMS 1997: 45) concludes. For most EU industries, product innovation is a goal of equal or greater importance than process innovation and occupies most of the RTD personnels time (EIMS 1997: 23). Classical economic theory says that product innovations have a positive effect on employment since they open the way for the development of either entirely new products, and, consequently, can satisfy latent demand beyond the existing markets, or create variations of mature products. In the latter case, the income effect has to be compared with the substitution effect. At any rate, product innovations generally involve an increase in employment at the firm, sector and national level. Process innovations generally have a direct negative or short-term employment impact that may be compensated for by market forces in the long run. An interpretation problem can arise since product innovations in a given sector are often process innovations for the customer sectors. Plant- and firm-level data do not allow the assessment of the overall impact of a given innovation. If the innovation is labour-saving, the analysis mainly describes the direct negative effect and measurable compensation is limited to the intra-firm counterbalancing forces. If the competitive effect is dominant (since the market share of an innovative firm increases), the employment effect of technical change may turn out to be positive for the most innovative firms. Investments have therefore a twofold effect on employment: on the one hand, there is an expansionary effect due to the increase of production capacity; on the other hand, investments introduce labour-saving processes. In an Italian study (Vivarelli et al. 1995), it was found that the overall positive correlation between innovation intensity and the use of labour was entirely due to the disembodied activity of design and engineering. RTD expenditures and innovative investments seemed to have an adverse impact on employment. While RTD activities may be related both to product and process innovations, large manufacturing firms seem to concentrate on process innovations and this bias helps to explain the result. The impact of process innovations on employment turns out to be significantly negative supporting the classical hypothesis. Another finding, however, suggests that firms may innovate not only to increase production, but also to insure themselves against shocks. When faced with shocks, innovative firms are able to move their equilibrium employment levels more rapidly than non-innovators. Thus, it would appear that during recessions technical competency is associated with job losses, but during economic upswings more jobs are created by technologically dynamic firms.

24

A partially contradictory result was obtained in the European innovation study (EIMS 1997: 37). In terms of output and labour input growth, innovating firms as a whole did not perform better than companies which did not introduce new products to the market. However, another important asymmetry emerged. Small innovative firms exhibited better employment and output performance than any other class of firm. The best performance was reached by companies which innovated on the basis of continuous RTD activities. Innovative firms showed a better export performance than the control groups, but their results in domestic markets were inferior. Moreover, innovativeness was linked to having a higher share of qualified workers. This is consistent with the widespread view that, at present, technical change, accompanied by competition from low wages in newly industrialised countries, leads to the expulsion of low-skilled workers. This topic is considered in the next section. The results of studies on the Organisation for Economic Cooperation and Development (OECD) countries and across industries indicate that during the 1970s and 1980s the rates of return on both RTD performed at the industry level and RTD embodied in acquired products were positive and significant and that they were increasing in the 1980s (e.g. Sakurai et al. 1995). The estimated return on direct RTD variables for manufacturing is about 15 % on average across the countries. The ICT cluster played a major role in the generation and acquisition of new technologies. In particular, the ICT service sectors in Canada and in small European economies have obtained higher gains from international RTD spillovers than from domestic spillovers, while domestic RTD was more important in the United States, Japan and Germany.

2.4. Technology and human resources

Most research concerning the relationship between technology and human resources has been directed at workers skill requirements. Since incentives such as wages vary according to the skill level, the role of trade unions, and trade and competition between firms and countries are also important. The results obtained are not completely consistent with each other as the following examples show. Theoretically (Mortensen and Pissarides 1995), enterprises want to use the most modern technology that is available, but the cost of implementation prompts companies to stay with their old equipment until the investment becomes profitable. The decisive factor in this model is the wage rate. Workers in plants equipped with advanced technology are paid according to their productivity. If productivity rises compared with other firms, the employees receive a higher wage rate. Firms with a lower productivity also have to pay the same wage rate, because employees are able to change jobs for higher pay. As technological progress continues, wages grow and offering jobs becomes less profitable. Hence, jobs based on old technology are destroyed and are replaced by jobs involving new technology, as in these occupations the productivity of workers is high. In a sense, the process resembles Schumpeterian creative destruction. The results of a German study (Bellmann 1995) suggested that creative destruction processes associated with technological change involve the displacement and replacement of workers not only at the industry level, but also at the level of business units. This 25

means that ultimately creative destruction is endogenous to firms: in responding to technological changes companies can either replace their workers or upgrade existing jobs by retraining and by introducing new machinery in a more gradual way. This choice between internal and external adjustment is also likely to be affected by external conditions such as the availability of workers having the skills required for the use of new technologies, the costs of dismissals due to employment protection regulations and collective bargaining, constraints involved in the hiring process, and so on. Klling (1997) tested this theory using German plant data. He observed that the rate of job reallocation is higher in firms that keep the employment level constant than in companies which adjust the numbers of employees. Although the level of employment stays constant in the former group of plants, the structure of the labour demand changes. The firms employ more workers with high skills and less people having low skills. According to these results, the change in composition of demand for labour seems to be going against low-skilled workers. In firms which adjust the numbers of workers, the low skilled have more changes in employment than those with high skills. The employers seem to be making a distinction between the marginal and the core workforce layers. The first is low skilled and the second high skilled. Over the past two decades, the demand for low-skilled workers has decreased dramatically in the United States and in other developed countries. Berman et al. (1997) argue that pervasive skill-biased technological change rather than increased trade with the developing world is the principal culprit. The pervasiveness of technological change is important for two reasons. First, it is an immediate and testable feature of technological change. Second, under standard assumptions, the more pervasive the skill-biased technological change, the more widespread the substitution of less skilled workers by technology, and the harder the downward pressure on their relative wages that is exerted by world goods prices. The findings of Siegel (1995) suggest that there is a shift that increases the need for workers with higher skills. Although firms adopting new technologies experience a decline in total employment, the demand for workers shifts in favour of higher levels of education and skills. The results imply that technology adoption leads to an increase in the demand for non-production workers and a sharp decline in the demand for production labour. Furthermore, it seems that the age of an industrys technology and the probability of technology adoption are uncorrelated, and that there is a positive relationship between use of new technology and firm size. However, the demand for highly educated workers is inversely related to the age of technology used in an industry. RTD intensity and previous adoption patterns appear to be the strongest predictors of technology investments. The results support the notion that skill upgrading can be expected to occur after new technologies are implemented on the factory floor. The results are consistent with models predicting that machinery retooling investments and reorganisation of operations will be concentrated in times of recession because the opportunity cost due to the disruption caused by retooling is low during recessions.

26

2.4.1. Crowding out Crowding out is a process in which low-skilled workers become or remain unemployed, while high-skilled workers occupy simple jobs. Such a process can take place when unemployment among highly skilled workers increases. This may happen because of an exogenous increase in labour supply or because the profitability of complex jobs declines. Among some policy-makers, the crowding-out phenomenon has become a popular explanation for the relatively high unemployment rate of low-skilled workers. However, there are also other possible explanations. The results of a Dutch study (Van den Berg et al. 1998) suggest that in periods of high unemployment fewer workers with an intermediate or higher education are employed in simple jobs, which is not consistent with the crowding-out hypothesis. Moreover, for all job types the average skill difference measured by years of schooling was very small between workers forced out and those flowing in. This suggests that low-skilled workers in simple jobs are not being replaced by high-skilled workers, at least not on a massive scale. Workers with a better education earn significantly more even in simple jobs, which, in turn, indicates that they are more productive even in such jobs. Direct evidence on the job-cutting behaviour of firms also suggests that the origin of the relatively high unemployment among low-skilled workers lies in the fact that these workers face relatively high outflow and firing rates during bad times. The costs of dismissing low-skilled workers are typically small, since they have often enjoyed little firm-specific training. If crowding out was an important reason for the high unemployment rate of low-skilled workers, policy-makers should stimulate job creation at the top segments of the labour market to encourage high-skilled workers to leave simple jobs. The Dutch results suggest that low-skilled workers become unemployed because their jobs are no longer productive enough. Policies aiming to reduce unemployment of the low skilled should therefore focus directly on the lower segment of the labour market.

2.5. Information and communications technologies create jobs in the service sector
Information and communications technologies (ICTs) are the fastest-growing segment among technologies which companies acquire from outside sources. Certain types of technology tend to gravitate to certain sectors: IT to high-technology manufacturing, ICT to services and finance, insurance and real estate. Sectoral data show that the ICT industry cluster has played a major role in the generation and diffusion of new technologies and that the importance of the ICT cluster has grown over time (e.g. Kraemer and Dedrick 1998; EIMS 1997: 15). Using data from a survey of innovative service activities, Licht and Moch (1997) show that investment in IT has a stronger effect on the quality of services than on the productivity of the IT-using service sector firms. IT investment seems to be especially effective when innovations enhance the speed of delivery or the spatial and temporal availability of 27

services. Moreover, a German IT survey points to the need for differentiating between various types of IT investment: especially the most recent generation of IT acts as a source of productivity growth, whereas older generations of IT induce only minor effects on productivity. The suggestion that IT has a stronger impact on manufacturing productivity and the quality of service products than on the productivity of services is consistent with a recent observation in the United States: Computer-intensive sectors in services ... do not show considerable productivity gains. Outside manufacturing, both computerusing and non-computer-using sectors show labour productivity growth near 1 % per year in the 1990s far below the rapid productivity growth of earlier periods (Conference Board 1998). Early studies found no significant relationship between information technology investments and economic growth (Kraemer and Dedrick 1998). Indeed, despite large ICT investments, total factor productivity growth in the United States declined in the 1970s and 1980s, leading Roach (1987) to use the provocative phrase computer productivity paradox. Some studies using data on manufacturing industries showed little evidence of a link between computer investment and productivity (Brynjolfsson and Hitt 1998). Other studies found positive effects on intermediate factors such as cost-efficiency or market share. By the late 1980s, the conventional wisdom was that computers were not contributing significantly to productivity. However, there was also little evidence suggesting that computers were unproductive. In the early 1990s, new data became available which allowed a re-examination of some of the preceding results. For the first time, these data enabled researchers to look at IT investments and productivity using figures on large numbers of firms rather than on higherlevel aggregates such as manufacturing industries or the whole economy. Initial firm-level studies of IT and productivity have found that a USD 1 of IT capital is associated with a substantial increase in revenue each year. Other analyses have confirmed these studies using different sets of econometric assumptions, different characterisations of IT, and different subsets of the economy. Across these studies there is a consistent finding that IT has a positive and significant impact on firms output, contradicting claims of a productivity paradox (Brynjolfsson and Hitt 1998). Kraemer and Dedrick (1998) explain that the most persuasive theoretical explanation for the now discredited paradox is that the share of ICT investments in the total inputs to the economy has been too small to have had a measurable effect on output and productivity.

2.5.1. Organising production and distribution Investments in information technology do not provide total solutions for firms. Organisational variables such as the firms business structures and human resource management policies also matter. The innovative capacity of a firm is also an important factor linking technology adoption and firm-level performance. An increasing number of studies are focusing on these issues.

28

Entdorf and Kramarz (1995) used French data in an analysis of the effects of computerbased new technologies on wages and skills. These technologies were given to workers who were better paid than their fellow workers even before they started to use these machines. Furthermore, these workers learn, and they become more productive when they gain experience with new technologies. In terms of wage differentials, the introduction of computer-based technology raises wages not through mere use, but because of the experience acquired in its use. Experience with computer-based new technologies adds around 1 % each year to the wages of their users. However, the higher the original skill level, the less the compensation for the use of modern technology. Computer skills are a natural part of such occupations. In a Japanese survey (Motohashi 1997), so-called flexible organisations were likely to invest more in human capital development, and information technology made it possible for a firm to be managed efficiently by using a decentralised responsibility system. In the early 1990s, a major question in Japan was whether human capital development is compatible with organisational changes leading to staff reductions. Due to the recession, companies faced strong pressure to downsize. In fact, firms carrying out organisational changes were affected by relatively large employment losses, which may imply that organisational change is often linked with financial difficulty. In Japan, it was found that technology and organisational variables are positively correlated with the firms propensity to use incentive payments. Therefore, it was confirmed that a firm carrying out an organisational change is more likely to depart from the traditional Japanese seniority wage system, and is seeking a new style for the management of human resources. The Japanese study reveals that technology has clear employment effects. As compared to non-technology firms, positive and statistically significant coefficients are found. Employment growth by technology adoption is not temporary, which would reflect companies adjustment into a new environment, but fairly persistent. On the other hand, organisational change leads to employment reduction, which may be due to corporate restructuring in severe economic circumstances. Administrative jobs seem to diminish more rapidly than other job categories. The main result of a Danish analysis (Nyholm 1995) was that labour productivity among firms that make use of information technology in production and design (advanced manufacturing technologies) has not developed significantly better than in other firms. However, there is a tendency for this pattern to change enabling firms to reap the benefits of new technology after a long learning process. Firms that have combined the introduction of information technology with organisational changes in management and the workplace have obtained the highest growth rates in productivity. One of the reasons for the generally weak productivity growth seems to be that most firms have used technology within old organisational structures. It is particularly important to be aware of the interaction between the effects of technology and company organisation during a period when technical progress is generic by nature. Brynjolfsson and Hitt (1998) and Bresnahan et al. (1998) have further emphasised the importance of workplace organisation and human resources strategy for productivity and quality of services. Their data are derived from large IT companies. The studies suggest that organisations that utilise decentralised decision-making and have employees with

29

higher skill and education levels appear to invest more in IT. But why do so many organisations retain old organisational structures? A plausible reason is that implementing decentralising organisational changes is time consuming, risky, and costly. Redesigning management infrastructures, replacing staff, changing fundamental company practices such as incentive pay and promotion systems as well as redefining core business processes are not easy tasks. So far, there is little econometric evidence on the employment effects of new ICT products and services based on mobile phones, multimedia, and electronic commerce (see also the chapter on the information society in this volume). A 1998 OECD survey on jobs and electronic commerce disputed the common belief that economies resulting from on-line business will cause widespread job losses. There is no evidence so far of widespread displacement of workers, says the report. In the short term, there may be net employment creation as firms experiment with the new mode of commerce; in the medium term there may be losses. But in the longer term, the combination of new products, extended market reach, income gains and lower prices derived from productivity increases will lead to net employment gains. New job opportunities will be created because of the need to support electronic commerce by related on-line services and content provision which require software as well as audiovisual and music products. The OECD predicts that the new jobs will offset losses that take place in traditional business services. It is clear that electronic commerce will require new skills that will further increase demand for information technology professionals.

2.6. Conclusion
On the whole, the weight of evidence from recent econometric work corroborates the case of the optimists. In the long run, advances in technology tend to create more jobs than they displace. The next question is: in what kinds of industries and countries is the rate of job creation rapid? And what kinds of skills will be in greatest demand in the future? Answers emerging to these questions tend to support the RTD policies of industrialised countries, as many of the most well-paid jobs of the future are likely to involve high technologies and expert skills. Yet the process of job creation may be painful. We shall have to learn and teach new skills, but also adapt the ways we run our organisations and institutions.

References
Baily, M. N., Haltiwanger, J. and Bartelsman, E. J. 1994. Downsizing and productivity growth: Myth or reality?, Center for Economic Studies, Discussion Paper 94-4, US Bureau of the Census.

30

Bellmann, L. 1995. Internal and external destruction, Conference on the Effects of Technology and Innovation on Firm Performance and Employment, Washington, 2 and 3 May. Berman, E., Bound, J. and Machin, S. 1997. Implications of skill-biased technological change: International evidence, NBER Working Paper 666. Blanchflower, D. and Burgess, S. 1996. New technology and jobs: Comparative evidence from a two country study, Discussion Paper 285, London School of Economics. Bresnahan, T. F., Brynjolfsson, E. and Hitt, L. M. 1998.Information technology, workplace organisation and the demand for skilled labour: Firm-level evidence, Working paper MIT, Stanford and Wharton. Brynjolfsson, E. and Hitt, L. M. 1998. Beyond the productivity paradox: Computers are the catalyst for bigger changes, Communications of the ACM, 41 (8), pp. 49-55. Conference Board. 1998. Computers, productivity, and growth, Economic Research Report 1213-98-RR, New York. EIMS. 1997. Exploring innovation in Europe, CORDIS Focus, 10 December 1997, European Commission, Innovation programme, the European Innovation Monitoring System (EIMS). Entdorf, H. and Kramarz, F. 1995. The impact of new technologies on wages, Conference on the Effects of Technology and Innovation on Firm Performance and Employment, Washington, 2 and 3 May. Jarmin, R. S. and Motohashi, K. 1997. Technology and productivity: Insights into employment from firm level datasets in France, Japan and the United States, International Conference on Comparative Analysis of Enterprise Data, Bergamo, Italy, 15 to 17 December. Jovanovic, B. 1979. Job matching and the theory of turnover, Journal of Political Economy, 87, pp. 972-990. Kraemer, K. L. and Dedrick, J. 1998. Information technology and economic development: Results and implications of cross-country studies, the UNU/WIDER Meeting, Helsinki, 12 and 13 June. Klling, A. 1997. Employment dynamics by different skill groups: Are there shifts in labour demand against the unskilled?, European Low-Wage Conference, London School of Economics, London, 12 and 13 December. Laaksonen, S. and Teikari, I. 1999. Analysis of effects of reconstructed business units on employment and productivity, in Biffignandi, S. (ed.), Micro and macrodata, statistical analysis and international comparison, Physica Verlag, Germany, pp. 373-392.

31

Licht, G. and Moch, D. 1997. Innovation and information: Technology in services, ZEW Working Paper 97/20, Mannheim. Mortensen, D. T. and Pissarides, C. A. 1995. Technological progress, job creation and job destruction, Centre for Economic Performance, Discussion Paper 264, London. Motohashi, K. 1997. Technology adoption, organisational change and human resource strategy: Some observations in Japanese firms, International Conference on Comparative Analysis of Enterprise Data, Bergamo, Italy, 15 to 17 December. Musick, N. 1998. Heroic plants Persistently-rapid job creators in the longitudinal research database, Center for Economic Studies, Discussion Paper, Washington. Nyholm, J. 1995. Information technology, productivity and demand for skills in Danish manufacturing, Conference on the Effects of Technology and Innovation on Firm Performance and Employment, Washington, 2 and 3 May. Roach, S. 1987. Americas technology dilemma: A profile of the information economy, Economics Newsletter by Morgan Stanley, 22 April. Sakurai, N., Papaconstantinou, G. and Ionnidas, E. 1995. The impact of R & D and technology diffusion on productivity growth: Evidence for 10 OECD countries in the 1970s and 1980s, Conference on the Effects of Technology and Innovation on Firm Performance and Employment, Washington, 2 and 3 May. Schumpeter, J. A. 1942. Capitalism, socialism and democracy, Harper and Row, New York. Siegel, D. 1995. The impact of technological change on employment, Conference on the Effects of Technology and Innovation on Firm Performance and Employment, Washington, 2 and 3 May. Vainiomki, J. and Laaksonen, S. 1997. The effects of technology on job creation and destruction in Finnish manufacturing, 1986-93, in Laaksonen, S. (ed.), Evolution of firms and industries, Statistics Finland Research Reports 223, Helsinki, pp. 234-251. Van den Berg, G. J., Gautier, P. A., van Ours, J. C. and Ridder, G. 1998. High unemployment rates for low-skilled workers: Does that mean there is crowding out?, Conference of Linked Employer-Employee Data, Washington, 21 and 22 May. Vivarelli, M., Evangelista, R. and Pianta, M. 1995. Innovation and employment: Evidence from Italian manufacturing, Conference on the Effects of Technology and Innovation on Firm Performance and Employment, Washington, 2 and 3 May.

32

3. The information society: seeking benefits and reducing risks

Huub Meijers Maastricht Economic Research Institute on Innovation and Technology (MERIT)

Summary
In 1998, the information society came to be regarded more as a necessity rather than just a possibility. Events of the year highlighted some of the benefits and risks in the societal transition. Consumers of information and communication technology (ICT) products and services were seen to be vulnerable to excess pricing and other forms of manipulation by enterprises which have a monopoly position. For this reason, the first signs of success in the liberalisation of the telecommunications market were welcome. One of the aims of the liberalisation is to increase the exploitation of the Internet both by European consumers and companies. For businesses, the real issue is electronic commerce and the resulting globalisation of customer markets. In 1998, fears about the millennium bug illustrated techno-economic risks that the information society may bring about in the future.

33

3.1. Introduction
In the information society, information is an important factor of production, and economic growth is fuelled by the application of new concepts and technologies. The information society tingles with insights, ideas and news, as well as new forms of arts and expertise. RTD policies of today have the dual responsibility of creating affordable infrastructures for carrying information to homes and workplaces and sustaining the best traditions of science, so that the society has the tools to reflect upon the wealth of information made available by the new information technologies (ITs).

3.2. Liberalisation and convergence

In 1998, lower prices in the telecommunications services and perhaps even some of the company mergers in the sector indicated the effectiveness of regulatory measures and competitive pressures. National regulatory authorities (NRAs) started their work in all the EU Member States. The Commissions Fourth report on the implementation of the telecommunications regulatory package recognised considerable decreases in the charges of public service telecommunications networks (PSTNs) for both home and business users (European Commission 1998). Between 1996 and 1998, PSTN call charges for residential users declined in most of the EU Member States. The exceptions were Finland and Italy where charges increased by 1.4 and 0.6 % per year, respectively. The steepest price reductions, 27 % per year, were achieved in the Netherlands. However, differences within Europe remained large, as can be seen in Figure 2. The lowest tariffs were to be found in the Nordic countries and in Luxembourg, whereas Spain, Portugal, and Greece had the most expensive phone calls, at least relative to purchasing power parity, that is, from the viewpoint of the consumers. Relative to the prevailing exchange rates, which are more relevant to the service providers, the difference was also considerable. Competition can indeed be said to lead to lower prices, as the number of operators in a country seemed to have an influence on the level of PSTN charges. For instance, the number of operators authorised to offer national public voice telephony is small in Portugal (one provider), Spain (three) and Greece (one). Luxembourg was an exception, given that the prices were the lowest there despite the fact that there was only one provider. All in all, there is no doubt that the liberalisation of the telecommunications market has reduced prices and that consumers have benefited. In 1998, expectations about the convergence of the telecommunications market with the media and IT sectors were heightened and raised an important policy issue. The convergence is expected to come about in two different forms: (i) supply of services of a similar kind through different network platforms; and (ii) merger of consumer devices such as the telephone, personal computer and television. New technologies will allow for faster connections via the existing infrastructures, and multimedia products such as audio and video may become widely available through the Internet. The asymmetric digital subscriber line (ADSL), for instance, allows Internet connections to be at least as fast as 34

a cable infrastructure can provide. In the future, news providers and Internet content providers may join forces, and already the Internet is becoming an important source of news to the public. Figure 2: Residential PSTN charges in the EU Member States

Source: European Commission (1998). (Key: # oper. gives the number of operators authorised to offer national public voice telephony in August 1998.)

Future changes may challenge the present system of regulations. Already, the Commission has started deliberations on the topic, and a Green Paper (European Commission 1997a) was discussed in 1998. One source of tension is the fact that while the telecommunications markets are regulated by national regulatory authorities (NRAs), competitive conditions in the IT sector are monitored, with some exceptions, by the national competition authorities (NCAs). In general, the NRAs put more restrictive measures on the telecommunications industry than the NCAs do on the media and IT industries. As cable companies compete with telecommunications operators on the Internet market, for instance, it can be asked whether the current framework leads to fair competition. Perhaps both industries should be subject to the same rules and be supervised by a single authority. The fact that the telecommunications operators have to provide universal service and emergency numbers free of charge does not automatically imply that they should be regulated by a separate authority. These services can also be secured by offering subsidies to the most competitive provider. The ultimate paradox may be that at the moment when liberalisation of the telecommunications market is finally proceeding in Europe, new developments in the industry and the convergence of the telecommunications, media and IT sectors can create 35

a need for revised forms of regulation. Such measures may be required in the interest of preserving fair competition and market dynamics in the long run.

3.3. The cost and extent of Internet penetration

Europe lags behind the United States in the exploitation of the Internet. The number of on-line households is estimated to be about 7 million (about 4 %) in Europe whereas about 23 million US households (24 %) are connected to the Internet (Jupiter Communications). Although the estimates vary, the difference between Europe and the United States is real. Forrester expects that in 2001 about 13 % of Europeans will have access to the Internet, whereas about 34 % of the US population will be on-line. In Europe, high costs of PSTN and Internet connections have been cited as one reason for the low penetration of the Internet. This is what the Campaign for Unmetered Telecommunications (CUT) has argued. The organisation fights for fair pricing for telecommunications users and has called for the introduction of flat-rate charges, for calls to an Internet service provider using a telephone modem, to enable all Europeans to access the Internet without economic or geographic discrimination (NUA 1999). CUT argues that the introduction of new multiplexing and switching technologies will make the supply of bandwidth almost unlimited, and that metered access will become unnecessary. However, it can be argued that the new technologies are not yet widely available and that their implementation may take time. The current (low-speed) infrastructure will have to be used for some time. Moreover, past experience shows that demand for bandwidth may increase even faster than supply. Bandwidth will continue to be a scarce good and thus it will have to be priced accordingly (Varian 1995; MacKie-Mason and Varian 1995). A graph which we have compiled helps to put the cost factor into perspective. Figure 3 relates the number of Internet users to that of consumers who have a personal computer at home and to the price of Internet usage. The downward sloping trend of the graph indicates that lower costs go along with a higher level of Internet penetration. A 10 % decrease in the cost of Internet access would tend to increase the number of Internet users by 6.7 %. However, a 10 % increase in the number of personal computers (PCs) would increase the number of Internet users by almost 10 %. This is why the number of PCs is a much more important determinant of Internet usage than the cost of Internet access.

36

Figure 3: The cost and extent of the Internet penetration in OECD countries

Sources: Prices taken from OECD (1997) and the number of Internet users and the penetration rates of PCs from International Telecommunications Union (1998). We have estimated the following relation: Int = p pc where Int indicates the number of Internet users per 10 000 inhabitants, p indicates the price (PSTN plus IAP charges for 20 hours of Internet use at off-peak tariff) as shown in the figure and pc indicates the number of PCs per 100 inhabitants. The parameter indicates the price elasticity and its estimated value is 0.67 (a 10 % decrease in price will lead to a 6.7 % increase in the number of Internet users). shows the relative importance of having a PC and the estimated parameter is 0.995, i.e. almost equal to 1. An increase in the number of PCs of 10 % will increase the number of Internet users by 10 %. Finally, is a constant. For the records: the t-statistics are for = 1.6 (not significant) and for = 5.3 (significant), whereas the adjusted R 2 is 0.71.

Our results are strong enough to put into perspective the findings of a survey on the views of executives of 95 European companies. According to the results of the survey, published in 1998, the executives believe that telecommunications deregulation is the most critical issue that affects European Internet growth (Sawyer et al. 1998). Attitudes towards technology and the infrastructure are also thought to be important issues currently hampering the growth of the Internet. Less critical are cultural and linguistic differences, costs of access, and regulatory environments at national and EU level. The least critical is, surprisingly, the penetration of PCs and Internet appliances. However, as we have shown above, although the cost of access is a significant factor, the penetration of PCs is much more important. Measures that further the adoption of PCs at home will also contribute towards more extensive exploitation of the Internet. To summarise, it is doubtful whether the supply of bandwidth can become unlimited in the near future. Therefore, there is a need to put a price on it and the call for a low flat-rate access price can be rejected from a purely economic point of view. We have also shown 37

that the cost of Internet usage is not the only determinant of the penetration rate of the Internet in our homes. A PC or another Internet access device is also required, but factors such as awareness, perceived usability, general attitudes towards new technologies and cultural differences may be as important as well. Further studies seem to be required to improve our understanding of the true reasons for the delayed Internet growth in Europe.

3.4. Charting the first hesitant steps of electronic commerce

Europes relative position in exploiting the Internet and electronic commerce is not known with great accuracy as there are few official statistics on the diffusion of the Internet. There is even less reliable data available on e-commerce; it accrues mainly from enterprises engaged in e-commerce, market research firms and management consulting agencies. The private suppliers of statistics may have ulterior motives for producing an upward bias in the statistics; they rarely give insights into their methodologies, definitions, coverage, and statistical robustness of the data. So the question arises as to whether e-commerce is hype or not. Recently the OECD published a lively background report for a ministerial conference on e-commerce in Ottawa. The reported estimates of the worldwide value of e-commerce varied from USD 70 million to USD 8 000 million per annum (OECD 1998a: 27). Evidently, there is a need for more accurate statistics, and, in fact, the required work is being carried out at a national level in Canada, the United States, France, the United Kingdom, the Netherlands and the Nordic countries. Basic statistics on the Internet for all the countries of the EU are collected by Information Society Promotion Office (ISPO). The OECD and Eurostat are currently working on definitions and classifications of ecommerce. However, the production and distribution of reliable statistics will take some time. What is not in doubt is that e-commerce will have some impact in the next century. For an application that is only three years old, its potential is already evident in the important challenges it presents to some large economic sectors communications, finance and retail trade (about 30 % of GDP) and the opportunities it offers to others, especially education, health and government (about 20 % of GDP) (OECD 1998).

3.5. Prospects for electronic commerce in Europe

While the numbers of consumers participating in e-commerce may be lower in Europe than in the United States, the shopping behaviour of the Europeans does not seem to differ much from the Americans. The Graphic, Visualisation and Usability Center (GVU) of the Georgia Institute of Technology carries out a worldwide survey on the Internet and related topics each half year. The results of the April 1998 survey showed that the distribution of on-line purchases is about the same in Europe as in the United States as is shown in Figure 4 (GVU 1998). Of the Europeans who shopped on-line, about 38 % spent less than USD 100, whereas the figure was 30 % of the US Internet shoppers.

38

Figure 4: Distribution of on-line purchases during the six months prior to April 1998 in the United States and Europe (US dollars)

Source: Graphic, Visualisation and Usability Center, ninth survey, April 1988. (Columns do not add up to 100 % because the dont knows and missing values are not displayed.)

In Europe, the availability of safe methods of payment seems to be a more crucial issue than in the United States, where the use of credit cards as well as catalogue-shopping has been more common. The past success of the French Minitel system indicates that there is also huge potential for e-commerce in Europe. But will the impact of e-commerce be positive or negative for European economies?

3.6. Economic impacts of electronic commerce

Passamonti and Lucchi (1998) estimate the impact of e-commerce on the four major European economies: Germany, France, Italy and the UK. The direct effect, consisting of the increase in value added and in employment, is related to the revenues generated by commercial websites. Indirect impacts include effects coming from inter-industry linkages as well as those arising from increased incomes and consumption. Passamonti and Lucchi estimate that in 1998 employment related to e-commerce in the four European economies amounted to almost 173 000 jobs as shown in Table 1. This figure included indirect effects resulting from the intermediate deliveries that are necessary to produce goods and services sold through the Internet. However, the figure does not include substitution effects, i.e. the loss of sales, production, and employment in other sales channels. If Internet sales just replaced traditional channels, the net employment effect of e-commerce would be restricted to about 4 000 jobs. 39

Table 1. The impacts of e-commerce in France, Germany, Italy, and the U.K.
France Germany Production (1998, million ECU at 1996 prices) Primary: direct (industry direct requirements) Primary: indirect (inter-industry linkages) Secondary (consumption-income linkage) To t a l Leontief Multiplier (direct+inter-industry linkages) Keynesian Multiplier (consumption-income linkage) Total Multiplier Value Added (1998, million ECU at 1996 prices) Primary: direct (industry direct requirements) Primary: indirect (inter-industry linkages) Secondary (consumption-income linkage) To t a l Employment (1998, units) Primary: direct (industry direct requirements) Primary: indirect (inter-industry linkages) Secondary (consumption-income linkage) To t a l Source: Passamonti and Lucchi (1998) Italy UK 4 Majors

521 352 1,035 1,908 1.67 1.98 3.66

860 570 1,283 2,713 1.66 1.49 3.16

551 291 1,005 1,847 1.53 1.83 3.35

2,053 1,480 4,208 7,741 1.72 2.05 3.77

3,984 2,693 7,531 14,208 1.68 1.89 3.57

281 185 571 1,037

456 300 688 1,444

328 156 555 1,039

1,003 728 2,022 3,753

2,069 1,368 3,837 7,274

3,425 2,733 9,867 16,025

4,374 3,956 10,339 18,669

7,205 4,560 17,373 29,138

26,617 19,681 62,594 108,892

41,621 30,930 100,173 172,724

Passamonti and Lucchi can be criticised for not taking into account the investment in ICT equipment that takes place as a result of increasing e-commerce. The number of employment opportunities created by increased demand for ICT equipment can be substantial. Cohen (1997) studied jobs created by the increased need for ICT equipment resulting from the growth of the Internet in the United States. He estimated that the increase in employment will amount to 700 000 to 900 000 jobs in 2005 even after substitution effects are accounted for. For Europe, he foresees similar figures but with a delay of three or four years. Therefore, it seems safe to conclude that the total employment effects arising from e-commerce in Europe should prove to be substantial, as e-commerce can be seen as one of the main driving forces of the growth of the Internet and ICT equipment demand. Taxation of the Internet and Internet transactions was an issue that received some attention in 1998. The EU policy is to make no difference between e-commerce and traditional methods: VAT is applicable to all supplies of goods and services for consumption within the EU regardless of the means of communication or commercial mode used to effect the transactions. The EU VAT system should therefore provide the legal certainty, simplicity and neutrality required for the full development of electronic commerce (European Commission 1997b). The member countries have similar aims, as businesses require certainty about the tax rules; neutrality between electronic and conventional commerce; no double or unintentional non-taxation; compliance costs should be as low as possible; no new taxes on electronic commerce; and the use of modern technology by our tax administrations to improve the service they offer their customers (HM Customs and Excise 1998).

40

At the moment, some on-line purchases of goods and services imported from outside the EU are escaping taxes. Immaterial goods, in particular, can cross EU borders unnoticed. An estimate of the size of the tax loss and its economic impact on the Netherlands was given by Meijers (1998). The study presented a forecast of the resulting macroeconomic effects assuming that the share of on-line purchases will grow to about 5.5 % of total private consumption by 2020 and that 50 % of on-line imports will not be taxed because of their invisible nature. The resulting tax loss would increase the Dutch public deficit by about EUR 630 million in 2020; for the EU as a whole, the figure would range between EUR 2 and EUR 7 billion. Given the size of these effects, it was recommended that a study of the tax issues should be approved at the Ottawa conference.

3.7. International Internet initiatives

Due to its own success, the Internet is almost coming apart at the seams. Frequently, congestion of the network hampers academic research and disrupts the work of the international research community. Two extensive projects have been launched in the United States to combat the congestion. The projects, Internet2 and Abilene, are interdependent and yet complementary. The main goal of Abilene is to build a backbone network for Internet2. Abilene will provide a connection between the regional networking aggregation points, the so-called GigaPoPs. The Abilene project is being carried out in a partnership between the University Corporation for Advanced Internet Development (UCAID), Qwest Communications, Nortel and Cisco Systems. UCAID is supported by 175 member organisations, including 135 universities, 40 corporate members, and about 25 affiliated organisations. The Abilene backbone is expected to operate at 2.4 gigabits per second initially, but later its speed will be upgraded to 9.6 gigabits per second. In addition to reducing congestion, the Internet2 project is also expected to enable and encourage development and diffusion of applications of a new generation. It is also intended to support all levels of education by enabling distant learning, lifelong learning and related initiatives. The Internet2 project may open up opportunities for highly sophisticated and pioneering technologies which can greatly influence the look of the Internet in the coming century. In Europe, several initiatives aim at upgrading connections between European universities and research centres. TEN-155 is a new pan-European network which operates at the speed of 155 megabits per second (Mbps). The project has been co-funded by the European Commission under the fourth framework programme. The project will increase the bandwidth but, in contrast to the Internet2 project, is not intended to produce applications and services of a new kind. The contract with Unisource Belgium, the supplier of the network services, started in December 1998 and has been signed for three years, during which time an upgrade to 644 Mbps is anticipated. The TEN-155 initiative will move Europe forward and facilitate communication between universities and research institutes. However, compared with the proposed bandwidth of the Internet2 and Abilene projects, the TEN-155 specifications are not so ambitious. One 41

possible reason is that even the current use of the European backbone is below the full capacity. However, supply (or its scarcity) may shape demand as the perceived lack of speed and bandwidth discourage innovative but bandwidth-consuming research proposals. The challenge for Europe is to launch projects that would stimulate RTD in ICT and produce spillovers to other sectors, including education. Whether to go in the same direction as the United States or to concentrate on fields such as encryption is a crucial question for European RTD strategy.

3.8. Networking at home and in the workplace

Given that the Internet, in general, and electronic commerce, in particular, offer substantial economic benefits, how can their use be furthered in Europe? As noted above, the survey amongst executives of European enterprises indicated that the liberalisation of the telecommunications market is the first requirement. Secondly, the executives believed that the infrastructure should be improved, and that the attitudes towards technology are an important factor influencing the use of the Internet. The introduction of ICT into schools and the integration of its use in the curricula could accelerate the adoption of new technologies at work and at home. In European schools, the number of students per computer varies significantly as can be seen in Figure 5. The United States together with the UK and the Nordic countries, Norway, Finland and Sweden, have the highest penetration rates. A strengthened effort to encourage the use of computers in schools should be high on the political agenda to create positive attitudes towards computers and new technologies in general.

Figure 5: Numbers of students per computer in schools in some OECD countries

Source: OECD (1997: 118). (Key: * Primary and lower secondary schools; ** Upper secondary schools.)

42

Hawkins (1998) concludes in his report that commercial governance should be seen as the most important overall focus for e-commerce policy. The three basic objectives of ecommerce policy should be: to develop electronic commerce applications that support their specific tactical and strategic objectives; to experiment with new commercial models in an electronic market place; to learn from each other, such that transferable electronic commerce competencies develop in as many areas as possible (Hawkins 1998: ii).

The most important aim should be to encourage trust and confidence in e-commerce. The principal task is to ensure that the electronic market place is as reliable as traditional markets. Hawkins lists four key areas of action: ensuring openness in the market place; monitoring technical and commercial standards; skilling the trading communities; encouraging development of the user interface.

The development and use of encryption technologies and other methods of secure payment (e.g. electronic cash systems) are of vital importance for e-commerce in Europe. The algorithms to create strong encryption (Triple DES and upwards) are well known and as the US Government has restricted the export of encryption software, European companies have been able to advance their market shares. However, in December 1998, European governments participating in the Wassenaar arrangement agreed to limit exports of strong encryption software. Encryption is of particular importance for European banking, since European banks have taken the lead in world Internet banking. According to Bleusky International, a private Internet research and marketing firm, western Europe has nearly twice as many transactional Internet banks as the United States (Bleusky 1998). Leading countries are Germany, Spain, France and the Netherlands. Among the 863 European and 1 676 US Internet retail banks reviewed in the study, there were 476 intermediate and advanced cyberbanks in Europe and only 249 in the United States. The customers of intermediate cyberbanks can consult their accounts and statements on-line, while those of advanced cyberbanks can transfer money, pay their bills and access other financial services on-line. The European leading position is a valuable basis for further advances in the development of national and international services.

3.9. The bite of the millennium bug

The millennium bug is probably the most costly technical problem in the ICT sector so far and reveals societys dependence on ICT and ICT-related products. The background of the problem is simple, but efforts required to overcome it are complex. Because of the initial high cost of computer memory, it became customary to use two digits to indicate the year of a date in software; the year 2000 would be stored as 00, but computer programs could also interpret that as the year 1900. The result was that in computers and other 43

appliances there were billions of lines of computer code and possibly millions of chips infested by the millennium bug. In 1998, the Gartner Group studied the Y2K problem in 87 countries and found that only the United States and Australia were ahead in their preparedness for the year 2000. Most European countries were between 1 and 6 months, 6 and 12 months or even more behind. The latter group was said to include France, Germany and Italy. Cap Gemini interviewed 1 100 firms in the OECD area in 1998 and concluded that 13.6 % of the firms in Europe and the United States will not complete the work in time. The readiness varied between 1 % in France and 74 % in Germany (Cap Gemini 1998). According to the OECD, some government services, the healthcare sector and the retail trade have a high risk of being hit by the Y2K problem, as shown in Table 2.

Table 2. Y2K exposure and compliance by sector

Exposure High High Finance, Banking, Insurance, Air-transport Compliance Medium Telecommunications, Manufacturing, most government services, energy Shipping Medium-Low Other government services, health care, retail trade

Medium Low

SMEs Agriculture, Construction

Source: OECD (1998b: 22).

Given the uncertainties of the extent of the infestation, only rough estimates can be given of its economic effects. For the Netherlands, the ING Barings Bank estimated that the economy-wide impact will amount to a 1.1 % decline in the national income relative to a baseline forecast. Exports will decrease by 3.6 %, whereas imports will decrease by 2.0 % (ING Barings 1998). For the United Kingdom, Dresdner Kleinwort Benson concluded that the output could drop in 2000 by about 1 % due to a large number of non-compliant systems. However, the spending on fixes has a positive impact on economic growth. In the end, it was estimated that the net effect would reduce the GDP growth by 0.5 % over the three years to 2001. (See also, IDC 1998.)

3.10. Closing the gates of innovation

One of the most important antitrust suits of this century was launched in May 1998, but the final outcome of the case against Microsoft was not expected to be known soon. Microsoft is determining the look-and-feel of the operating system of desktop computers and has control over the medium which has the highest viewing figures in the world: the computer screen. The question as to whether or not Microsoft is a monopolist is no longer an issue.

44

The big question is whether the dominance of the monopolist is harmful to the development of innovations in the software market. Traditional economic theory does not give decisive answers. Many empirical studies point to the direction of an inbetween position. In the software industry, a monopolist may have more incentives to innovate than in more traditional industries. Because software is not really consumed and shows no physical deterioration, sales have to be generated either by attracting new customers or by issuing new versions of old products. In order to be successful, a new release has to incorporate sufficient novelties to make an update attractive to consumers. That is why there is a positive incentive to innovate, but the urge to take into account users wishes may be weaker than in a market where perfect competition rules. Even reluctant consumers may be swayed by their peers to buy up-to-date versions of office applications which produce documents that are intentionally designed to be incompatible with older versions of the software. There is some evidence to show that Microsoft may have used its market power to slow down new developments. The introduction of Java, a programming language that can be used on PCs, mini-computers, mainframes, and also in other appliances was seen as a threat to Microsoft, because Java applications can be run by using any operating system. Microsoft responded by trying to modify the programming language so that applets would be dependent on the Windows operating system. Although Microsoft claims that these modifications were introduced in order to improve the product, the changes can also be regarded as a way to break the principal strength of the Java language, i.e. it runs on different operating systems. On 17 November 1998, a US federal judge in California ordered Microsoft to stop shipping its own version of Java. Is Microsoft hampering technological change? The available evidence suggests that it is; the software giant may not use its full potential to innovate, although that is what its CEO wants the public to believe (see Gates 1998). It may be that in the future the new cooperation between America Online (AOL), Netscape and Sun Microsystems will challenge Microsoft and that we may be navigating the Internet in an entirely new and innovative way due to AOLs marketing expertise, Netscapes browser software and Suns Java.

3.11. Conclusion
Telecommunications costs have been declining due to the liberalisation and regulation of the telecommunications market in Europe, but the differences between Member States are still large. The convergence of the telecommunications sector with the media and IT sectors is becoming an important issue and the possibility of unfair competition due to different laws and regulations is increasing and calls for policy attention. One of the challenging issues in 1998 was how to increase the diffusion of ICT products and services and to create a positive public attitude to the Internet and to electronic commerce. The decreased telecommunications prices seem to have a positive impact, but a range of actions should be considered to further the use of ICT in Europe and to be able to secure its direct and indirect economic benefits. Although a large number of initiatives have been carried out in this direction, the topic should stay high on the political agenda given its socioeconomic potential.

45

References
Bleusky. 1998. Advanced Internet banking explodes in Europe, press release from Bleusky International Marketing (URL: http://www.bleusky.com). Cap Gemini. 1998. One in seven organisations in Europe and USA will not be able to complete by year 2000 (URL: http://y2k.capgemini.com/). Cohen, R. B. 1997. An economic model of future changes in the US communications and media industries, Communications & Strategies, 28, pp. 87-104. European Commission. 1997a. Green Paper on the convergence of the telecommunications, media and information technology sector, and the implications for regulation: Towards an information society approach, COM(97) 623. European Commission. 1997b. A European initiative in electronic commerce, communication to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions, COM(97) 157, 15 April 1997 (see also, URL: http://www.ipso.cec.be.convergencegp/). European Commission. 1998. Fourth report on the implementation of the telecommunications regulatory package, report to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions (see also, URL: http://www.ispo.cec.be/infosoc/telecompolicy/en/comm-en.htm). Gates, W. H. Bill Gates replies, The Economist, 13 June, pp. 23-27. GVU. 1998. GVUs Ninth WWW user survey, Graphic, Visualisation and Usability Center, Georgia Institute of Technology (URL: http://www.cc.gatech.edu/gvu/user_surveys). Hawkins, R. 1998. Creating a positive environment for electronic commerce in Europe, ACTS/FAIR Working Paper, No 36. HM Customs and Excise. 1998. Electronic commerce: UK policy on taxation issues, joint paper by the Inland Revenue and HM Customs and Excise, 6 October. IDC. 1998. The worldwide financial impact of the Y2K problem, International Data Corporation (URL: http://www.idc.com). ING Barings. 1998. Defusing the time bomb: A millennium survey, Global and Emerging Markets Research. International Telecommunications Union. 1998. World Telecommunication Development Report 1998, ITU, Geneva. MacKie-Mason, J. and Varian, H. R. 1995. Pricing the Internet, mimeo, University of Michigan. 46

Meijers, H. H. M. 1998. Fiscal impacts of the growing use of advanced communication technologies and services: A quantitative analysis, ACTS/FAIR Working Paper, No 34. NUA Internet Surveys. 1999. 4 (4), NUA Limited, 1 February (URL: http://www.nua.ie/ surveys/). OECD. 1997. Communications outlook 1997, OECD, Paris. OECD. 1998a, The economic and social impact of electronic commerce: Preliminary findings and research agenda, OECD, Paris. OECD. 1998b. The year 2000 problem: Impacts and actions, PUMA(98) 10/final. Passamonti and Lucchi. 1998. Preliminary estimate of the multiplier effects of electronic commerce on EU economy and employment, ACTS/FAIR Working Paper, No 47, March 1998, Databank Consulting, Italy. Sawyer, J., Nagle Green, E. and Gerber, S. 1998. Europes Internet growth, The Forrester report: European new media strategies, April (URL: Forrester: http://www.forrester.com). Varian, H. R. 1995. Pricing information goods, mimeo, University of Michigan (URL: Hal Varian: http://www.sims.berkeley.edu:80/~hal/people/hal/).

47

4. Vehicle manufacturing: the race for new concepts

Marie-Laure Spaak Agency for the Diffusion of Technological Information (ADIT) Petra Dx and Heinz Eickenbusch Verein Deutscher Ingenieure (VDI)

Summary
In 1998, most of the largest car companies of the world were involved in international mergers or acquisitions. In RTD, important advances were made in developing technologies that may constitute parts of low-emission vehicle infrastructures of the future. Fuel cells and hybrid vehicles emerge as principal options for the future. Driven by tight air quality regulation, some of Europes competitors seem to be on the verge of finding solutions that will form the basis of the vehicle technologies of tomorrow.

49

4.1. Introduction
In the automotive industry, the quest for productivity and cost reduction led in 1998 to international mergers and RTD alliances. The automotive industry responded with a broad set of solutions to the demands for large product variety, environmental protection and safe mobility. Some of the events in 1998 are listed in Table 3. Table 3. Public demands, political instruments and responses from the auto industry in 1998.

Public issues
Protection and creation of jobs by improving competitiveness

Political instruments
RTD instruments investment subsidies

Industrial responses

Events of 1998

globalisation the merger of Daimler co-operation and Benz and Chrysler consolidation the launch of Smart by outsourcing MCC modular systems virtual manufacturing green car alliances to develop light weight vehicle fuel cells low pollution engines growing hybrid vehicle design for recycling production by Toyota Auto Oil agreement in Europe legislation on car recycling manufacturers wireless information services wireless traffic safety services

Environmental protection

emission standards directive on end of live vehicle harmonisation of technical regulation

Improvement of traffic road safety campaigns intelligent vehicles flow; safe and efficient traffic services information services mobility traffic regulations sustainable mobility

Mergers and cooperation projects enable vehicle manufacturers to cover risks in market niches, where success not only increases market demand but also the need for larger product variety and better competitiveness. Outsourcing, modular technologies and concurrent engineering are bringing in lean management practices. Despite the intense competition in the automotive industry, the strive for cost reduction, efficiency and progress forces manufacturers to cooperate in developing innovative technologies such as new fuel-cell constructions. The growing ecological awareness, which is politically expressed in tightening emission standards and regulation of car recycling, prompts the industry to develop light weight vehicles, low-pollution engines and new designs for recycling. Moreover, customer demand for safe mobility is bringing about the development of intelligent information systems for various types of cars and vehicles.

50

4.2. Year of giant mergers and acquisitions

The year 1998 was marked by intense international acquisition and merger activity in finance, telecommunications, the oil industry, and vehicle manufacturing. In the car industry, some cooperation projects were fuelled by the need to increase RTD cooperation, to share RTD risks, and to increase potential for product variety, while other moves were based on expected cost savings. Worldwide excess production capacity and the Asian economic crisis also contributed to the crisis. In December 1998, it was reported that General Motors (GM) and Toyota were discussing the joint development of advanced vehicle technologies such as electric vehicles and fuel cells. GM already has a strong position in electric-drive technology. Toyota produces a gasoline-electric hybrid car called the Prius and intends to develop fuel-cell technologies. In a transatlantic takeover, Daimler-Benz AG acquired Chrysler, the third-largest US vehicle manufacturer, in a move which was completed by November 1998. DaimlerBenz had concentrated on producing luxury cars and heavy trucks, whereas Chrysler was a manufacturer of moderately priced cars and light trucks. DaimlerChrysler is expected to benefit from the complementary product ranges and sales infrastructures of the parent companies. In Europe, Volkswagen acquired Rolls-Royce, once a regal symbol of British motoring. Only a few months later, Audi purchased the luxury car manufacturer Lamborghini. In Asia, Hyundai took over Kia after Ford had acquired a stake in the bankrupted company.

The net outcome of the year of the mergers was a car market dominated by five global corporations: General Motors, DaimlerChrysler, Ford, Toyota and Volkswagen. The five main players have some links between them and are also involved in alliances with smaller manufacturers. General Motors remains the worlds largest vehicle manufacturer. It owns Germanys Adam Opel AG, the UKs Vauxhall Motor Cars Ltd, Holdens in Australia, 50 % of Saab Automobile AB in Sweden and about a third of Isuzu. On top of that, GM operates a joint venture in Canada with Suzuki and a California-based assembly plant New United Motor Manufacturing Inc. (NUMMI) with Toyota. Ford Motors owns Jaguar plc as well as a one-third stake in Mazda and at the end of 1998 Ford was reported to be considering other acquisitions, possibly that of Volvo. The pooling of resources is not a simple matter when two companies join forces. It was said that the business culture of Daimler-Benz was conservative and almost dismissive of anyone who suggested cutting corners on quality for anything so ephemeral as profit. Perfectionism was at home at Daimler. In contrast, Chryslers near-death experience was said to have turned the company into a lean, profit-obsessed organisation, short on bureaucracy but long on management talent. If in conflict, pragmatism and margin protection would take precedence over quality at Chrysler (Seaman and Stodghill II 1998). 51

DaimlerChrysler AG remains a German corporation and hence half of its 20-member supervisory board (a group separate from the board of directors) have to represent the companys labour force. The result may be the emergence of new alliances between unions in the United States and Europe. The RTD activities of the company will be put under one umbrella, so that each part of the company can help the others to design new products.

4.3. New concepts for outsourcing and lean management

The Micro Compact Car (MCC) is a European company with sites in Germany (product development, system integration), Switzerland (marketing, sales, finance) and France (production, final assembly). MCC was founded only in 1994 and has been able to take advantage of up-to-date management principles, such as the use of modular assembly. The company itself is responsible for only 10 % of the fabrication involved in the production of its Smart cars. Of the large car manufacturers, at least GM, Ford, DaimlerChrysler, Mercedes-Benz, BMW, Volkswagen and Fiat were testing modular car-making methods in 1998. The most common modular concepts are based on dividing suppliers into different categories. There are supplier companies which contribute by providing their own complex product concepts and others which produce parts designed by the manufacturer. A third group of suppliers deliver specific parts just in time directly to the assembly line (Traudt 1998). Consequently, at MCC there are three types of material flows. The first consists of complex modular systems from suppliers located at the production site. In addition, single parts are received directly from local suppliers, and non-durable goods are transported in containers to the assembly line (Gross 1997). When a modern car manufacturing plant is established, independent suppliers often follow suit and establish their own plants in the neighbourhood (Cahill and Ducatel 1997). The main criteria used in selecting locations for new plants are the socio-economic circumstances of the regions. MCC, for instance, placed the production plant in France because of low wages and flexible labour laws, as well as positive work attitudes and technology awareness (Pfeffer 1998). Automotive companies try to concentrate on their core competencies and to establish closer ties with their suppliers as well as customers. As a result, production schedules are shortened and flexible manufacturing processes are introduced. At MCC, manufacturing operations are characterised by self-managing teams and flexible work schedules (Kuhn 1998). Robots are only used for heavy assembly tasks (Kaltenbrunner 1998). Warehousing has been given up and all deliveries are directed to the assembly line. Product development times are shortened by the use of simulation programs, which reduce the need for prototypes and shorten test phases. Nevertheless, manufacturers still face problems when late engineering changes have to be implemented. It seems that some of the problems reflect poor communication between design and production engineers two proud tribes which have problems in acknowledging each other (Jones 1998).

52

4.4. Fuel cells

Within 20 to 30 years, fuel cells can be expected to bring a radical change to vehicle propulsion technology. After several years of scepticism, all major vehicle manufacturers are now interested in this technology, billed as the most promising alternative to the internal combustion engine. A fuel-cell vehicle powered by hydrogen offers the zero-emission benefits of battery-powered vehicles but avoids the range, recharging, and weight penalties associated with batteries. What is more, fuel cells may soon reach the point where they are becoming economically competitive with conventional power-generation technologies. Fully competitive buses will become available in 1999 and passenger cars are expected to follow suit in three to six years. In April 1998, Daimler-Benz, Ford, and the Canadian firm Ballard Power Systems formed an alliance aiming at commercial production of fuel-cell powered cars, trucks and buses. The agreement gives Daimler-Benz and Ford a 20 % and 15 % interest in Ballard, respectively. Ballard will develop the fuel cells, Ford will manufacture the electric drive motors and electronic controllers, and Daimler-Benz will assemble crucial accessories such as fuel processors. Ballard Power Systems, based in British Columbia, is the acknowledged world leader in fuel-cell development; the company has 400 employees but barely USD 25 million in annual revenues. Other companies are also racing to develop the technology. Toyota and General Motors announced in June 1998 that they are joining forces to develop, among other environmentally friendly technologies, fuel cells for advanced low-pollution vehicles. The joint effort is aimed at challenging the alliance between Daimler-Benz, Ford, and Ballard. Toyota Motor Corporation plans to develop a practical fuel cell that could be used in automobiles by 2003, and GM expects to have a production-ready car, with its own fuel cell, by 2004. In comparison, Daimler-Benz has opted for an aggressive strategy with 40 000 car engines planned for 2004, 70 000 for 2005 and 180 000 for 2007, although the company agrees that there is a risk that the customer may not want to buy a technology which has a limited infrastructure to support it. General Motors feels that development of the fuel-cell vehicle has to be part of a comprehensive and coordinated effort which would also include public policy and supporting industries, because no single company has the resources to effect the changes necessary to ensure success on its own. In Europe, several car manufacturers have teams working on fuel-cell technology. In October 1998, Renault unveiled a prototype of a hydrogen-based fuel-cell car. The car is non-polluting, silent, and offers a range of 400 km, which is well beyond the 80 km range of electric cars. The major drawbacks of the prototype, however, are cost and the size of the fuel cell, which takes the place of the rear seats and boot. The prototype marked the culmination of the European research project FEVER launched in 1994 by five partners (Nora and Ansaldo of Italy, Volvo of Sweden, the cole des Mines de Paris and Air Liquide of France). The most important remaining technical obstacle to the implementation of fuel-cell technology in automobiles is where to store the hydrogen fuel. Cars, unlike buses, are too 53

small to carry big tanks of gaseous hydrogen. A more compact liquid fuel, such as methanol, gasoline, or kerosene, is required. A fuel processor or reformer, which is really a miniature chemical factory, is needed on every vehicle in order to extract hydrogen from liquid fuels. Even so, much less carbon dioxide would be emitted than by the best internal combustion engines of today. Daimler-Benz has opted for methanol as the best compromise. This liquid fuel can be converted to gaseous hydrogen in a simple process and the result is a near-zero-emission performance.

4.5. Hybrid vehicles

Hybrid cars seem to offer a good interim solution before the transition to an all-electric vehicle is possible. Until recently, hybrid cars were viewed by the automotive industry as impractical, but the situation is changing because of the pressure to meet tough pollution reduction goals. Hybrid vehicles combine zero-emission electric motoring in cities with the range and performance of petrol engines on the open road. Hybrid electric vehicles have a major advantage in that they require few infrastructure changes. In addition, consumers may be willing to accept hybrid cars as their characteristics do not differ much from those of conventional vehicles. Hybrids do without the inconveniences of reduced autonomy and long recharging times associated with electric cars. Toyota took the lead in hybrid cars when its Prius model was introduced in Japan in December 1997. Prius is the first clean vehicle to be produced on an industrial scale for the general public, and is available at a nearly affordable price. In the Toyota hybrid system (THS), electricity propels the car at low speeds, particularly in heavy traffic conditions. When cruising on the highway, the power is supplied by the gasoline engine which allows the same range and fuel supply as a purely gasoline car. For maximum acceleration, both the engine and the battery are used to drive the wheels. The vehicle is said to achieve nearly twice the fuel efficiency of ordinary gasoline engine cars and hence to reduce carbon dioxide emissions by one half. Toyota engineers estimate that the fuel consumption of the car is about 3.9 l per 100 km (60 miles per gallon) and expect the cars exhaust emissions to fall within the ultra-low-emission vehicle (ULEV) category. Emissions of carbon monoxide, nitrogen oxide and hydrocarbon are cut by 50 to 90 %. By July 1998, Toyota had sold 7 500 units in Japan, which was much more than expected. The company now hopes to sell 20 000 of these cars in North America and Europe (Lewin 1998). In May 1998, the Japanese New Energy and Industrial Technology Development Organisation (NEDO) announced that it planned to develop fuel-efficient, clean-burning vehicles in cooperation with six vehicle manufacturers including Nissan and Mitsubishi. Most of the vehicles will be hybrid models with up to 2.5 times the fuel efficiency of conventional cars. In Europe Audi has developed the Duo hybrid car, based on a Siemens maintenancefree electric power unit. Moreover, eight car manufacturers from the European Council for Automotive Research and Development have pooled their resources with six leading transportation institutes to investigate the opportunities and risks of hybrid vehicle propulsion systems. The European Commission funded the project, called HYZEM 54

(European hybrid technology development approaching efficient zero-emission mobility). The HYZEM team has analysed various hybrid drive systems, evaluating their environmental benefits and energy savings. A simulation program was developed in the project to allow engineers to simulate performance, fuel consumption and emissions of vehicles over arbitrary drive cycles. Parallel hybrid drive concepts were studied by BMW, Fiat and Volkswagen, while series hybrid vehicles were studied by Daimler-Benz, Renault and Volvo. The project also involved PSA Peugeot Citron and Rover. A case study was carried out to assess the emission reduction potential of hybrid vehicles; it showed that, for instance, within the Greater Athens area the introduction of hybrids could provide benefits once the number of cars equipped with this new technology is about 10 % of new cars coming onto the market each year.

4.6. Towards intelligent traffic services

For both economic and environmental reasons, improvement of traffic flows in large European cities is an important goal. In the future, the use of on-board terminals and the development of wireless services delivering information on congestion, parking spaces, and even the availability and schedules of other forms of transport, are one approach that may improve future traffic flows and increase the use of intermodal transport. Eventually, on-board electronic equipment may add to the safety of the driver by enabling the development of adaptive cruise control methods and driver drowsiness detectors. Transponders could be used to detect obstacles and pick up signals from traffic information services. In the United Kingdom, Motorola, Vodafone, Vauxhall, and the Automobile Association have teamed up to develop an intelligent traffic information system (ITS) for General Motors. The Vauxhall OnStar system is an in-vehicle communication system providing emergency response, roadside assistance and other services via a 24-hour information centre. It includes an invehicle global positioning system (GPS) along with a mobile phone. Similar systems are being developed by other car manufacturers such as BMW, Mercedes, Audi and Nissan, as well as computer companies, including IBM and Microsoft. In the future, standardisation and cooperation may become important issues for the purpose of keeping the costs of ITS infrastructures and services at a reasonable level. Some estimates put the value of the global annual ITS market at over EUR 15 billion over the next few years. In Japan, Honda recently introduced a new driving aid that is intended to make up for errors caused by human carelessness. The Honda intelligent driver support system compensates for mistakes made under normal driving circumstances. It recognises road lanes through a camera, measures the distance to the car ahead with a lasersensor and is able to regulate speed and car-to-car distance. In November 1998, Toyota started experimental work with an urban transportation system based on buses that can be linked together with sensors and driven in convoys in a train-like manner on dedicated lanes. Organisations developing and promoting ITS have been established in many countries. In Europe, there is ERTIS (European Transport Telematics Implementation Coordination

55

Organisation), while in the United States ITS America has a similar role. In Japan, Vertis (Vehicle, Road and Traffic Intelligence Society) promotes ITS.

4.7. Regulating vehicle technology

In 1998, important milestones were reached in regulating passenger car technology. The main achievements concerned air quality and recycling car materials. Future research needs concern both technology development as well as the economic and environmental impacts of new technologies. In June 1998, an agreement was reached between representatives of the EU Council and the Parliament on a major package of measures aimed at reducing traffic pollution. Emissions of passenger cars will be tightened in two steps in the year 2000 and in 2005. New environmental specifications for petrol and diesel fuels will take effect from the year 2000, by which time leaded fuels are to be phased out, although delays up to 2005 may be allowed. The agreement known as the Auto-Oil package allows the use of tax incentives to facilitate the early introduction of new emissions technologies and retrofitting of catalysts to older vehicles. In the United States, national low-emission vehicles will be required nationwide by the model year 2001. According to estimates of the US Environmental Protection Agency (EPA), nitrogen oxides and other pollutants contributing to the formation of ozone will be notably reduced as a result of the new regulations. In Japan, the national Environment Agency and the Transport Ministry hope to tighten the regulations on vehicle emissions from the year 2000. The aim is to cut the amount of air pollutants emitted by gasoline-powered vehicles by 30 % from the current level. A group of 37 companies has begun joint development of low-emission engines and fuel. The project is backed by the Ministry of International Trade and Industry (MITI), the Environment Agency and the Ministry of Transport. In the EU countries, between eight and nine million vehicles are discarded each year, and, consequently, between eight and nine million tonnes of waste are created per year. About 25 % of the weight of discarded vehicles is hazardous waste which today is placed in landfills sometimes contaminating soil and groundwater. This fraction amounts to about 1.9 million tonnes of waste per year, and represents up to 10 % of the total amount of hazardous waste generated in the EU. In July 1997, the Commission presented a directive on end-of-life vehicles. The aim is to introduce changes in the way vehicles are designed, used and recycled. Among the Member States, three different groups of different concepts for handling end-oflife vehicles can be identified. In some countries, end-of-life vehicles are not addressed by specific actions. In others, commercial enterprises have taken the initiative (Italy, France, Spain, Austria, United Kingdom). In a few countries, recycling is backed by legislation (the Netherlands and Germany; in Sweden and Belgium legislative proposals were being prepared in 1998).

56

In April 1998, the German legislation on end-of-life vehicles came into effect. It obliges the last owner of a car to leave the vehicle to a dismantling company or to a licensed receiving point. The last owner is further obliged to pay for the costs of handling nonprofitable vehicle parts (about EUR 100). Thereupon he/she receives a proof of realisation, which he/she has to present at the registration office, when he/she wants to cancel the registration of his/her car (VDI-KUT-Redaktion 1998). However, the certification concepts of dismantling companies are not harmonised between all the Bundeslndern. For a small payment, end-of-life vehicles can be transported by towing services to east European countries, where they can be abandoned in the countryside thus affecting the environment (BDE 1998). In the Netherlands, car recycling has been mandatory since 1995 and is managed by the Auto Recycling Nederland (ARN) organisation. In contrast to the German system, recycling is financed by a fund to which the first owners pay a waste-disposal fee of about EUR 75 when a car is registered. The fund pays dismantling companies for the handling of nonprofitable materials. The last owner receives payment for still valuable parts of the car when he/she brings the vehicle for dismantling (Eggink 1998). Statistics based on a Dutch information system show that 90 % of all Dutch cars are recycled in an environmentally responsible way. Up to 86 % of the weight of the constituent materials of cars can be recycled. The aim is to increase the recycling rate up to 95% (Environmental Report 1997). This will increase waste-disposal fees as it will require more costly measures. As the fee has to be paid by the first owners, little encouragement is given to automotive industry to develop recycling-friendly cars. Many vehicle manufacturers are saying that they are striving to increase the proportion of recyclable materials in their cars. Smart of MCC is reported to be recyclable up to 95% including a low amount of recycling by energy recovery. One reason for this is the low use of composite materials which are still difficult to recycle. Moreover, all defect or used parts bought in Smart-Centers are taken back by MCC for recycling (Nieser 1998).

4.8. Conclusion
The pooled RTD resources of the merged international vehicle manufacturing companies will be a great asset for technology development, but the future creativity of the conglomerates will depend on how successful they will be in creating new corporate identities and bringing together their constituent business cultures. Europe needs the manufacturing jobs of the automotive industry, and it may be even more important to gain a front position in the development of environmental vehicle technologies that will be required in the future. Ways have to be found to combine European expertise in motor, chemical, electronics and wireless technologies for the development of robust environmental solutions for the vehicles of the future.

57

Acknowledgements
The authors wish to acknowledge Dr A. Simbrger (VDI-Gesellschaft Fahrzeug- und Verkehrstechnik), Dr K. Redeker (VDI-Gesellschaft Frdertechnik Materialflu Logistik), G. M. Eggink (ARN), J. H. G. Karperien (ARN), E. Kaltenbrunner (MCC), S. Nieser (MCC), P. Kuhn (MCC), K. Pfeffer (MCC), A. Demmel (ADAC), and J. L. Phelps (OICA) for the helpful advice and information they provided.

References
ADIT. 1997. Lannuaire des technologies cls, Agence pour la Diffusion de lInformation Technologique. BDE. 1998. Press-service, Bundesverband der Deutschen Entsorgungswirtschaft e.V. (URL: http://www.bde.org/). Cahill, E. and Ducatel, K. 1997. Advanced technology and the competitiveness of European industry, Technical Report Series, IPTS, pp. 54-61. Eggink, G. M. (ARN). 1998. Personal communication. Environmental Report. 1997. Stichting Auto & Recycling en Auto Recycling Nederland BV. French Embassy in Japan. 1997. Le Japon et les systmes de transport intelligents. Griffiths, J. 1998. Financial Times Automotive, No 1, May, pp. 11-14. Gross, W. 1997. Jahrbuch der VDI-Gesellschaft Frdertechnik Materialflu Logistik, VDI Verlag GmbH, Dsseldorf, pp. 375-385. Henry, P. 1998. Une voiture verte et intelligente, Technologies Internationales, 47, pp. 16-19. Jones, D. T. 1998. Financial Times Automotive, No 1, May, pp. 8-10. Jorgensen, P. 1998. Agreement is reached on Auto-Oil package Energy, European Commission, DG XVII. Kaltenbrunner, E. (MCC). 1998. Personal communication. Kuhn, P. (MCC). 1998. Personal communication. Lewin, T. 1998. Toyota Prius hybrid Driving the future, FT Automotive Environment Analyst, 42, pp. 18-22.

58

Nieser, S. (MCC). 1998. Personal communication. OECD. 1998. Environmentally sustainable transport, Conference Proceedings: Transport and Environment Interactions, Switzerland/Europe, Environment Directorate. Pfeffer, K. (MCC). 1998. Personal communication. Seaman, B. and Stodghill II, R. 1998. Here comes the road test, Time, 151 (19), 18 May. Traudt, H. G. 1998. Jahrbuch der VDI-Gesellschaft Fahrzeug- und Verkehrstechnik, VDIVerlag GmbH, Dsseldorf, pp. 183-193.

VDI-KUT-Redaktion. 1998. Umwelt, No 4, Redaktion der Koordinierungsstelle Umwelttechnik, Springer VDI Verlag, April, pp. 10-23.

59

5. Biotechnology: the next wave

Petra Dx and Anette Schmitt Verein Deutscher Ingenieure (VDI)

Summary
In biotechnology, new technologies flourish and form a fertile ground for new companies and whole industries. Events of 1998 illustrated some of the scientific and commercial opportunities that are opening up in the field. In Europe and elsewhere, steps were taken to clarify the regulatory status of technologies arising from research in life sciences. The first commercial applications of biotechnology are starting to penetrate consumer goods markets, but scientific research is only beginning to reveal the full scale of future opportunities that are likely to emerge. The risks involved are illustrated by the rapid spread of antibiotic-resistant bacteria strains, which threaten to overturn decades of success in the fight against infectious diseases.

61

5.1. Introduction
Biotechnology can be defined as a field integrating natural sciences and engineering in the application of organisms, cells, and their parts as well as their molecular analogues, in products and services. Advances in biotechnology are expected to create new opportunities in pharmaceuticals, healthcare, agriculture, food, materials, and other fields. Many observers see biotechnology as a driving force in the next technological upheaval that could shake and redefine the foundations of the industrialised economies to a similar extent as information technology.

5.2. The race for the genome of the human race

5.2.1. Costs and goals The sequencing of the human genome is one of the largest and most far-reaching research projects ever undertaken in the history of science and technology. In the United States, the human genome project was started in 1990. The primary goal of the project, coordinated by the Department of Energy and the National Institutes of Health (NIH), is to identify all of the estimated 80 000 genes and determine the order of three billion chemical base pairs of the human DNA (Waterston and Sulston 1998). The boldness of the project was underlined by the fact that not all of the technologies required to fulfil the task in the assigned period of 15 years were available at the time of the launch of the project. Since then, new highly automated gene sequencing technologies have been introduced in the United States and Europe. As a result, the goal is now to complete an accurate, high-quality sequence of the human genome by the end of the year 2003. It is hoped that the cost of sequencing can be reduced to USD 0.25 per base pair, which is less than a quarter of the present level (Collins et al. 1998). 5.2.2. Rush for intellectual property in genes In May 1998, it was announced that a new US company, Celera Genomics, would try to produce a close approximate to the complete human genome sequence by 2001. The method used by the company will be rapid and less expensive than that used in the government-sponsored effort, but a large number of gaps will be left in the sequence. For a commercial company, it may be a good strategy to select the most promising areas of the human genome for sequencing. Even incomplete sequence information is often useful in locating genes of interest. However, it would be left to the academic world to sort out the details and fill the gaps, which may not always be easy. Celera Genomics will try to patent genes which may have biomedical uses (Marshall and Pennisi 1998; Pennisi 1998). There are several ways in which private companies can try to reap financial gains from the intellectual capital they have acquired by investing in gene sequencing efforts. They can try to sell exclusive or non-exclusive licences to their databases. Sometimes private companies choose to transfer their research results to the public domain (Eisenberg 1996).

62

A promising example of the latter is an effort in the United States to set up a public database on single-base variations of the genetic code. In the future, this data may be important in the development of DNA chips which can be used to decipher genetic patterns of disease, assist in the development of targeted drugs, and identify high-risk individuals for therapy (Marshall 1998). In a similar fashion, DuPont agreed in August 1998 to allow NIH as well as researchers funded by NIH and their academic partners to use its patented Cre-lox transgenic mouse technology at no cost. The technology has proved to be a valuable improvement on previous methods used in studies of gene function (Wadman 1998). In December 1998, the Icelandic Parliament passed a bill which has raised some concern on the grounds of privacy of genetic information. The bill allows a private company, Decode Genetics, to manage a comprehensive database containing health information about the entire population of Iceland. The company will be able link genetic and genealogical information to medical details that can be obtained from hospital records (Berger 1999).

5.2.3. Benefits and risks The accelerating pace of human genome sequencing will speed up the emergence of technologies that are directly and indirectly dependent on genetic knowledge. In the future, DNA chips containing thousands of strands of DNA may be used in rapid diagnostic tests yielding encompassing information about individuals genetic straits, illnesses and pathogens. More accurate genetic knowledge on humans and other species will increase the use of efficient research methods such as high throughput screening in identifying industrially and pharmacologically interesting proteins. The United States has taken the lead in the development of commercial DNA chips, and Europe should rapidly develop its technological knowledge in this field, which may prove to be of vital importance during the next few decades. DNA chips and other gene technologies will allow rapid genetic profiling of individuals, enabling the development of tailored medical treatments but also raising the risk of misuse of genetic information. The possible use of genetic tests by employers and insurance companies raises concern. Over the next few years, the European public will increasingly encounter the new risks and opportunities created by gene technology in everyday life (Rullmann 1998). The regulatory framework can be expected to cover first some issues related to the use of DNA databases (Greely 1998). International regulations on commercial applications of biotechnology are being put in place step by step. In May 1998, the European Parliament approved a new directive on biotechnical inventions. The decision solved an issue that had been debated for 10 years and brought the European patent practice closer to the policy that had been adopted by the United States. By making clear what is patentable and what is not, the directive will speed up patenting procedures in Europe. Elements of the human body including partial genetic sequences are not patentable; nor are procedures for human cloning. But an isolated human gene can be patented, provided that its function is known and that an application is defined for it, for example, in diagnostics. Transgenic plants or animals are also patentable (Abott 1998).

63

5.2.4. Bioinformatics The huge amounts of data flowing from various genome projects are stored and accessed in databases, the contents of which can be utilised by special software allowing searches of genetic sequences and comparisons of genes across individuals and species (Andrade and Sander 1997). The importance of developing efficient methodologies in bioinformatics is underlined by the common expectation that the impact of biotechnology will be huge in various fields such as medical science. New methods in bioinformatics are required to improve the productivity of genetic and biotechnical research. Some of the databases can be accessed through the Internet. However, differences in database structure and nomenclature mean that it is sometimes difficult for a researcher working on a gene or protein of one species to find corresponding data on other species. Some of the issues have been addressed in the Life Science Research Task Force organised by the Object Management Group (OMG), which is a non-profit-making organisation of the software industry. However, even agreeing on biological concepts and terms is sometimes a problem in the scientific community (Williams 1997). As a result of future advances in bioinformatics, it can be reasonably expected that new frontiers will open up in medical and life sciences. The future potential of biotechnology can be illustrated by examining advances which are being realised in one field of medical science, surgery, as described in detail in the box below.

Biotechnical tissue engineering: a new frontier for surgery

Biotechnology may create a new frontier for transplant surgery in the form of new materials which can sustain and promote the growth of human cells and organs. In the past, the basic approach of surgery was to identify and remove damaged or diseased tissue. At present, biocompatible materials and tissue transplants are often used to replace tissues that have to be removed. Over one million people have benefited from organ transplants. In the future, it may become possible to apply tissue engineering methods to grow spare parts for humans (Hench 1998: 1420). Tissue engineering is already a viable method for the regeneration of human skin. One piece of a babys foreskin can be used to produce more than 1.5 ha of engineered skin having a five-day shelf-life. One product has been described as behaving clinically like an autograft and being morphologically, biochemically, and metabolically similar to human skin (Kirsner et al. 1998: 248). Other organs on which cultivation research is being carried out include cartilage, blood vessels, the pancreas, and even the liver (Arnst 1998: 58). The cultivation of neurons will be a special challenge. Until recently, it was thought that neurons (with the exception of olfactory receptor cells) do not replicate in adults. Then neuron generation was discovered in adult rats, marmoset monkeys, and some birds. In November 1998, the first convincing evidence was presented on the regeneration of mature neurons in the adult human hippocampus, a centre of memory

64

and learning in the brain (Eriksson et al. 1998). In the future, it may become possible to implant neurons and stimulate their growth in the brain. Both in western Europe and in the United States, tens of thousands of people are awaiting kidney transplants (Rochi 1998: 23). The rapid development of tissue engineering methods would alleviate much human suffering and help to avoid the risks involved with the use of xenotransplants. One of the risks is the crossing-over of diseases from animals to immunosuppressed xenotransplant receivers and even to the wider human population. The recent history of diseases which have crossed over to humans include AIDS and bovine spongiform encephalopathy which has been linked with some cases of Creutzfeldt-Jakob disease. The existence of influenzatype viral diseases which develop new strains in pigs is another good reason for caution in the adoption of xenotransplant technology. -J.L.

5.3. Antibiotics and resistance genes

5.3.1. European action urged Within years after the introduction of antibiotics, the first signs of bacteria developing resistance were observed. During the first few decades of antibiotic use, increasingly powerful antibiotics could be substituted for those that had lost their effectiveness. However, it has been 20 years now since the last major antibiotic was developed. Everywhere in the world the numbers of people who have been infected with antibiotic-resistant pathogens have increased. Two glycopeptide antibiotics, vancomycin and teicoplanin, have been considered the drugs of last resort, because of their efficaciousness against many drugresistant pathogens; another antibiotic of the same class, avoparcin, is used in agricultural and veterinary applications in some countries (Moellering 1998). During 1998, incidents of high-level resistance against vancomycin were reported in many parts of the world. Of particular concern is that vancomycin resistance is emerging in virulent staphylococci (Raad et al. 1998) and could possibly spread to Streptococcus pneumoniae, a cause of pneumonia, meningitis and other diseases. A recent study concluded that collaborative national and international studies on the incidence of antibiotic resistance should be performed on a repetitive basis (Dornbusch et al. 1998). In 1998, the Economic and Social Committee of the European Communities (ESC) called for action to counter the threat posed by antibiotic-resistant bacteria. The Committee would like to instigate a centralised system to monitor the way in which antibiotics are used for medical and veterinary purposes in the EU. In its report, Resistance to antibiotics: A public health threat, the ESC says it wants EU governments to issue guidelines which would limit the spread of drug-resistant strains. The mechanisms of antibiotic resistance and their inhibition methods can also be expected to remain important research topics in the future. One factor leading to the emergence of resistant strains is excessive prescription of antibiotics by doctors and careless use by patients. In animal husbandry, antibacterial

65

agents are used not only for prophylaxis and chemotherapy, but also for growth promotion. The total amounts of some antibiotic compounds used in animal feeds greatly exceed their use in human medication. For instance, Australia has imported an average of 580 kg of vancomycin per year for medical purposes and 63 000 kg of avoparcin per year for animal husbandry. The action mechanisms of these compounds are similar, and that is why resistance to one can confer resistance to the other (Witte 1998). Human and animal microbial ecosystems are inextricably intertwined, and antibiotic resistance readily crosses boundaries between species and nations. In 1969, the Swann Committee in the United Kingdom concluded that antibiotics used in human chemotherapy or those that promote cross-resistance should not be used as growth promoters in animals. However, the debate on the issue has continued. Improved analytical techniques have provided circumstantial evidence that resistance of bacteria afflicting humans is indeed exacerbated by antibiotics in animal feed stocks. Regulations in the European Union countries follow the recommendations of the Swann Committee. In addition, the use of avoparcin was banned in 1997. However, other drugs (i.e. tylosin and virginiamycin) are still in use, and they may also cause cross-resistance to compounds used in human therapeutics (Witte 1998). 5.3.2. Seeds of resistance In September 1998, a French court decision suspended a permit given to Novartis to market some breeds of genetically modified maize (corn) seeds. The event marked the latest stage in an epic battle which started in 1994 when the company (then Ciba-Geigy) applied for a licence to market genetically modified maize. One issue that was raised against the company was the risk resulting from a maize gene coding for resistance against an antibiotic, ampicillin. The approach of the European Union on the marketing of genetically modified organisms (GMOs) is the deliberate release directive (Directive 90/220/EEC). Its aim is to satisfy the Treaty of Rome allowing free movement of goods throughout the Community and to foster harmonisation of health and environmental safety requirements throughout the Member States. If a company wishes to cultivate or market a GMO, it needs to apply for a permit from a Member State. At a later stage, the application is forwarded to each and every Member State for consideration (Butler 1997). One sign of the increasingly sophisticated regulatory environment in biotechnology is that the US Food and Drug Administration released in September 1998 a draft guideline on the use of antibiotic resistance marker genes in transgenic plants (FDA 1998).

5.4. Emerging markets in agribusiness

5.4.1. A difference in scales It is expected that there will be massive changes in agribusiness when biotechnological methods and products finally penetrate the market place (AgraEurope 1998). Novel

66

pesticides, disease-resistant plants, and fruits and vegetables modified and adapted to industrial and consumer needs may find growing markets in Europe. At the moment, though, concerns about the transition continue among consumers. In 1998, the world area planted with genetically modified crops more than doubled, from 14.2 million ha in 1997 to 35 million ha. Of the 1998 figure, 88 % were planted in North America, 6 % in Latin America, 6 % in Asia, and about 1 000 ha in France (Cultures transgniques 1998). Even by the year 2000, Europes share is not expected to exceed 1 % and the EU will capture only a tiny part of the estimated USD 2 billion market in 2000 (AgraEurope 1998). In Europe, environmental groups have applied pressure on governments and industry, and radical activists have even destroyed field trials. What has been perceived as overregulation by national administrations has also deterred investment in the development of transgenic crops. In 1997, approximately 900 field trials were authorised by European countries (61 in Germany, 148 in the United Kingdom, 333 in France, 91 in Belgium, 159 in Italy, and 90 in the Netherlands). During the same year, 3 000 trials were conducted in the United States, where only notification to the Environmental Protection Agency (EPA) is required. In Europe, applicants have to go through more lengthy procedures (Rttgers 1998). 5.4.2. Competing giants Large international companies have been building vertical chains of operations which stretch from the test tube to the tractor and to the family dinner table. Corporate giants have been buying biotechnology companies and forging alliances with them and seed companies and grain processors, as well as distributors. As a result, farmers using genetically engineered seeds are finding that their costs are dropping, and this is one reason why the number of acres planted with recombinant crops has been increasing. In 1998, the US biotechnology giant Monsanto acquired DeKalb Genetics Corp. (specialising in maize), Delta & Pine Land Co. (cotton) and Cargill (seeds). These moves may allow Monsanto to provide both technology and global reach. The company may be able to create broad seed platforms and better anticipate the needs of growers and processors. The new Monsanto seems to present a serious challenge to DuPont and Novartis.

5.5. Conclusion
Although the European Union does have a substantial research base in life sciences, health and biotechnology, the commercial development of this last sector has been slower than in the United States. Factors responsible for this situation include European weaknesses in the exploitation of research results, and difficulties encountered by small and innovative companies in bringing together the necessary financial resources. In Europe, only 2 % of venture capital goes to real risk investment in biotechnology, compared with 28 % in the United States.

67

In response, the European Commission and the European Association of Securities Dealers (EASD) have jointly founded the Biotechnology and Finance Forum. Its objective is to promote links between the biotechnology sector and venture capital firms, investment banks, institutional investors and business angels. National innovation programmes include the German BioRegio and the British Biotechnology means business initiatives. There is much room for new biotechnology companies in Europe, and that is why efforts to build bridges between RTD and commercial entrepreneurship have to continue.

References
Abott, A. 1998. Europes life patent moratorium may go..., Nature, 393 (6682), May, p. 200. AgraEurope. 1998. GM crops expanding worldwide, EP/6. Andrade, M. A. and Sander, C. 1997. Bioinformatics: From genome data to biological knowledge, Current Opinion in Biotechnology, 8 (6), December, pp. 675-683. Arnst, C. 1998. The latest from the labs: Human skin, Business Week, 18 May, pp. 5859. Berger, A. 1999. Private company wins rights to Icelandic gene database, British Medical Journal, 318 (7175), January, p. 11. Butler, D. 1997. Chair of GMO panel resigns over maize, Nature, 385 (6618), February, p. 667. Collins, F. S., Patrinos, A., Jordan, E., Chakravarti, A., Gesteland, R., Walters, L. R. and the members of the DOE and NIH planning groups. 1998. New goals for the US human genome project: 1998-2003, Science, 282 (5389), October, pp. 682-689. Cultures transgniques. 1998. Les superficies mondiales devraient doubler en 1998, February. Dornbusch K., King, A. and Legakis, N. 1998. Incidence of antibiotic resistance in blood and urine isolates from hospitalised patients, report from a European collaborative study, European Study Group on Antibiotic Resistance (ESGAR), Scandinavian Journal of Infectious Diseases, 30 (3), pp. 281-288. Eisenberg, R. S. 1996. Intellectual property issues in genomics, Trends in Biotechnology, 14 (8), August, pp. 302-307. Eriksson P. S., Perfilieva, E., Bjrk-Eriksson, T., Alborn, A.-M., Nordborg, C., Peterson, D. A. and Gage, F. H. 1998. Neurogenesis in the adult human hippocampus, Nature Medicine, 4 (11), November, pp. 1313-1317.

68

FDA. 1998. Use of antibiotic resistance marker genes in transgenic plants: Guidance for industry, Food and Drug Administration (URL: http://vm.cfsan.fda.gov/~lrd/ biotechm.html). Greely, H. T. 1998. Genomics research and human subjects, Science, 282 (5389), October, p. 625. Hench, L. 1998. Biomaterials: A forecast for the future, Biomaterials, 19, pp. 14191423. Kirsner, R. S., Falanga, V. and Eaglstein, W. H. 1998. The development of bioengineered skin, Trends in Biotechnology, June, pp. 246-249. Marshall, E. 1998. Private help for a public database?, Science, 280 (5364), May, pp. 667-668. Marshall, E. and Pennisi, E. 1998. Hubris and the human genome, Science, 280 (5366), May, pp. 994-995. Moellering, R. C. Jr. 1998. The spectre of glycopeptide resistance: Current trends and future considerations, American Journal of Medicine, 29 (104)(5A), May 1998, pp. 3S6S. Pennisi, E. 1998. DNA sequencers trial by fire, Science, 280 (5365), May, pp. 814-817. Raad, I., Alrahwan, A. and Rolston, K. 1998. Staphylococcus epidermidis: Emerging resistance and need for alternative agents, Clinical Infectious Diseases, 26 (5), May, pp. 1182-1187. Rochi, E. 1998. Challenges in tissue transplantation, OECD Observer, August-September, pp. 22-25. Rullmann, J. A. C. 1998. Personal communication, October. Rttgers, J. 1998. Agra-Europe, L13. Wadman, M. 1998. DuPont opens up access to genetics tool, Nature, 394 (6696), August, p. 819. Waterston, R. and Sulston, J. E. 1998. The human genome project: Reaching the finish line, Science, 282 (5386), October, pp. 53-54. Williams, N. 1997. How to get databases talking the same language, Science, 275 (5298), January, pp. 301-302. Witte, W. 1998. Medical consequences of antibiotic use in agriculture, Science, 279 (5353), February, pp. 996-997.

69

Part III: RTD in several non-EU countries

1. The United States: renewed expansion of research efforts

Jorma Lievonen In association with the Group for Technology Studies (VTT) Agency for the Diffusion of Technological Information (ADIT)

1.1. Introduction
The success which the United States achieved in combating its economic malaise of the early 1980s should inspire the rest of the world. The countrys failure to renew its health benefit system, setbacks in the fight against the drug trade and acts of random violence in society, as well as the mounting international debt, can be seen as warning signs. While important advances in information technologies and biotechnology were reported in the country in 1998, concern about their potential as a threat to privacy was also heightened.

1.2. Prowess in science and technology

In 1998, the United States continued to enjoy the longest period of economic expansion in its peacetime history. Factors that contributed to the growth of the economy included previous RTD investments, the agility of US enterprises to take advantage of new technologies, and the ability of the economy to create large numbers of service sector jobs, many of them in well-paid expert occupations. In 1997 alone, US investments in RTD exceeded USD 200 billion, which was almost as much as those of the other G7 countries combined and represented 44 % of the world total (National Science Foundation 1998). Yet it has been estimated that in 1999, of the top 20 corporations in RTD spending, only seven will have their headquarters in the United States (Schonfeld & Associates 1998). In constant-dollar terms, the amount invested by US industry in basic research efforts suffered a decline between 1991 and 1995, but has since recovered and was estimated to have reached USD 6.5 billion in current dollars in 1997. Similarly, financing of industrial applied research also declined between 1991 and 1994, but has since expanded by 37 % to an estimated USD 28.6 billion in 1997. In contrast to private RTD funding, the growth of the federal RTD budget levelled off in the late 1980s in real terms, and spending began to fall after 1992 as a result of the efforts to reduce the budget deficit. Between the fiscal years 1992 and 1996, the federal budget authority for RTD fell by 10.3 % and, despite the growth that has taken place since, in

71

real terms the federal research budget for 1997 was 8 % less than it was in 1992 (McGeary and Merrill 1998). In 1997, federal agencies provided 30 % of all the funds spent on RTD in the United States, down from 46 % a decade earlier, when the defence build-up reached its peak level. The impact of reduced military RTD was a major factor in lowering the share of federal support of total industry RTD from 32 % in 1987 to an unprecedented 14 % 10 years later (National Science Foundation 1998). The overseas RTD expenditures of US enterprises have grown three times faster than those in the United States. Overseas RTD expenditures now correspond to about 12 % of US industrys domestic RTD expenditures. The latest figures available are for 1995, and according to these 72 % of foreign US-funded RTD was performed in Europe, mainly in Germany, the United Kingdom, and France. Pharmaceutical companies accounted for 20 % of the US overseas RTD (National Science Foundation 1998). The United States leads the world in patenting. In 1998, it accounted for 42.3 % of patents filed under the World Intellectual Property Organisation (WIPO) of the United Nations. Germany was the second-highest user of the Patent Cooperation Treaty (PCT) system of WIPO and filed 13.8 % of the applications, followed by Japan (8.9 %), the United Kingdom (7.2 %) and France (4.6 %). By filing a PCT application, the applicant can obtain the effect of regular national filings in any or all of the 100 Treaty Member States without an initial translation of the application. Altogether, 67 000 PCT patent applications were filed worldwide in 1998 (WIPO 1999). A recent analysis of US patent information revealed the importance of publicly supported research for product development in the country. Of research papers cited in US industry patents, 73 % originate from public research at academic, governmental and other public institutions and only 27 % from private facilities. These figures can be interpreted as indicating that the dependence of patented technology on contemporary science is increasing, as the relative number of citations to scientific papers doubled in US patents over six years. Similar trends emerge in data on US patents by applicants from the UK and other countries (Narin et al. 1997). These findings stress the long-term economic benefits of publicly funded scientific research in stimulating the creation of patented technologies.

1.3. The growing importance of non-manufacturing sectors

One of the strongest societal trends in technologically advanced countries is the diminishing relative importance of the manufacturing sector as a direct provider of employment opportunities. The trend is also evident in the United States as a whole, as in many states this sector is in trouble; yet in states which have been growing faster than the average the growth has often been fuelled by the manufacturing sector. In research, product development and the financing of new company start-ups, the United States has efficiently exploited opportunities that have arisen in information and communication technologies (ICTs). It has been estimated that during the last 10 years employment in the computer and software industries has almost tripled in the United States. Yet the success has not been straightforward. In semiconductor manufacturing, the 72

US companies lost their lead in the early 1980s and 27 000 American jobs disappeared between 1980 and 1986. By 1998, the US semiconductor industry had recovered and was supplying 46 % of the worlds microchips, while the market share of Japanese companies was 41 % (Jones 1998). The United States dominates the Internet and many other areas of ICT, and is in a good position to take advantage of services that can be created in the emerging international networking economy. The strength of the US industry is also rapidly growing in other non-traditional fields such as genetic engineering and biomedicine. The country already has 1 300 companies and 120 000 private sector jobs related to biotechnology, while the corresponding figures for Europe are 700 companies and 28 000 jobs. In 1997, the US biotechnology companies invested about four times as much in RTD as the Europeans (Ernst & Young International 1998: 2). The importance of federal funds in supporting the emergence of the software industry and other fields of ICT is well established (Blumenthal 1998). These sectors are now able to sustain large privately funded RTD efforts and act as engines of growth in the economy. The non-manufacturing private sector accounts for one quarter of all private RTD expenditures in the United States. Software and biotechnology companies, in particular, are able to fund large-scale research efforts. President Bill Clinton has compared the potential impact of electronic commerce to the advances brought about by the steam engine, electricity and the industrial revolution. A Commerce Department study, The emerging digital economy, released in April 1998, showed that significant benefits are being created by the digital economy. According to the report, information technology industries now make up more than 8 % of the economy, and have accounted for about 25 % of the real economic growth in the US GDP during the past five years. More than seven million people work in IT jobs and earn wages that are two thirds higher than the average for all private sector jobs. Virtually all sectors of the economy are going on-line. Analysts project that by the year 2000 nearly 7 % of all US airline revenues for passenger travel will be generated by on-line sales. As many as 16 million households may do their banking via the Internet, and over USD 1 billion of insurance premiums will be paid on-line. Yet some problems remain. In software production, the growth of productivity lags behind the needs of the economy and one result is a shortage of software professionals. All too often, code verification and validation are granted a secondary status, and there are signs that software code reuse is exploited more fully in some Japanese corporations than in the United States. Software products contain errors and their repercussions are felt in many sectors of the economy. According to one study cited in an advisory report to the President, 73 % of software projects are late, substantially over-budget, cancelled, or fail outright. The report stressed the need to design scientifically sound approaches to software development that would enable practical testing of specifications and implementations for consistency. The development of such methods would require long-term research in computer languages, theories, simulation, analysis, and testing. The eventual aim would be the creation of standardised computer-aided methods similar to those which are used in designing processors and other hardware (PITAC 1998).

73

The challenge is to increase the productivity of not only software professionals, but also of other knowledge-worker categories such as managers, executives, professionals, and sales workers. Altogether, these occupations account for 71 % of US white-collar employment. In these occupations, job creation has remained steady in recent years, while employment growth has slowed down sharply in the supporting back-office staff categories which constitute the remaining 29 % of the service sectors white-collar workforce. Investment in information technology capital has reduced the growth of demand for support staff, but no rapid productivity breakthroughs seem to be emerging in the knowledgebased occupations in the white-collar service industry (Roach 1998). That implies that the shortages of expert staff in various knowledge-based occupations are here to stay and that societal returns for investments in training and education of professionals will be high.

1.4. Risks to privacy

While creating enormous benefits for society, ICT and biotechnology have also made it possible to develop applications which threaten individuals privacy. The concern about privacy issues increased in the United States in 1998 and provoked some tensions with Europe. In Europe, suspicions about US privacy protection policies were heightened by allegations about the Echelon intelligence-gathering network in early 1998. More than 80 % of American Internet users are concerned about threats to their personal privacy. This was the main result of a study released at a meeting of Internet businesses, on-line trade and privacy groups in June 1998 in Washington (Westin et al. 1998). Issues raising most concern were surreptitious tracking of Internet site visits, capture of e-mail addresses for marketing, and reading private e-mail. In August 1998, GeoCities, the provider of one of the most popular Internet sites, agreed to settle the charges of the Federal Trade Commission (FTC). The company had misrepresented to its customers the purposes for which it was collecting personal information. The companys database included information on customers e-mail and postal addresses, interest areas, income, education, gender, marital status and occupation. Third-party marketers were given personal identifying information on adults and children. The case was the first for FTC involving Internet privacy (FTC 1998). By late 1998, the United States felt pressure from the new European directive on data protection, according to which companies must notify both employees and consumers as to how personal information will be used, and individuals must be given access to data on them and the possibility to correct any errors. The United States did not have legislation which would safeguard similar rights, and, as a result, it was not certain if US companies could continue to transfer legally data on Europeans to the United States. The US Government gave the domestic industry the opportunity to develop self-regulatory measures on privacy issues relating to the Internet. DNA privacy involves not only individuals, but whole families and their offspring. It may yet take years to solve all the issues satisfactorily. By 1998, more than one half of the US states had enacted laws which prohibit health insurance companies to require genetic tests as a condition for coverage or for lower rates. The situation is not always clear in the case of policyholders who have become symptomatic of a disease or medical condition. 74

By 1998, 18 states had enacted laws providing that no employer may require genetic testing or may use the results of a genetic test or genetic information to discriminate in employment (Rothstein 1998). In a recent survey of genetic service providers and primary care physicians, it was discovered that these professionals knew of 582 individuals who were refused employment or insurance because of their genetic predisposition. The number was low compared with the total number of patients seen by the surveyed professionals, but it may be sufficient to indicate that genetic discrimination is possible (Miller 1998). In the future, when DNA chips will be used to gather and analyse genetic information rapidly, the importance of adequate privacy protection can be expected to increase.

1.5. Conclusion
Many aspects of the success enjoyed by the United States over recent years can be traced to the countrys ability to harness information technology efficiently for countless products and applications. The United States is also well poised to take a lead in many fields of biotechnology. The model that combines intellectual resources of some of the worlds leading universities with the entrepreneurship that permeates the US culture does not solve all the countrys problems, but it generates tremendous wealth for private companies and society. Can similar successes be achieved in other countries in conditions of lesser social inequality? Can world-class universities be created while at the same time taking care of the education needs of even the poorest sections of the society? These are some of the questions the American experience raises in the rest of the world.

References
Blumenthal, M. S. 1998. Federal government initiatives and the foundations of the information technology revolution: Lessons from history, American Economic Review, 88 (2). Ernst & Young International. 1998. European Biotech 97 The Fourth Annual Ernst & Young Report on the European Biotechnology Industry, Ernst & Young International, Stuttgart. FTC 1998. Internet site agrees to settle FTC charges of deceptively collecting personal information in agencys first Internet privacy case, Federal Trade Commission, press release 13 August (URL: http://www.ftc.gov/opa/1998/9808/geocitie.htm). Jones, K. A. 1998. Statement of The Honourable Kerri Ann Jones, Acting Director, Office of Science and Technology Policy before the Committee on Commerce, Science and Transportation, United States Senate, 28 April. McGeary, M. and Merrill, S. A. 1998. Tracking trends in federal research spending, Issues in Science and Technology, 15 (1). 75

Miller, P. S. 1998. Genetic discrimination in the workplace, Journal of Law, Medicine and Ethics, 26 (3). Narin, F., Hamilton, K. S. and Olivastro, D. 1998. The increasing linkage between US technology and public science, Research Policy, 26 (3), pp. 317-330. National Science Foundation. 1998. Science and engineering indicators 1998, Washington, DC (URL: http://www.nsf.gov/sbe/srs/seind98/frames.htm). PITAC. 1998. Interim report to the President, Presidents Information Technology Advisory Committee, Washington, DC, August 1998 (URL: http://www.ccic.gov/ac/ interim/). Roach, S. S. 1998. No productivity boom for workers, Issues in Science and Technology, 14 (4). Rothstein, M. A. 1998. Genetic privacy and confidentiality: Why they are so hard to protect, Journal of Law, Medicine and Ethics, 26 (3). Schonfeld & Associates, Inc. 1998. R & D ratios & budgets, Riverwoods, IL, United States, ISBN 1-878339-63-X. Westin, A. F. and Louis Harris & Associates, Inc. 1998. E-commerce & privacy: What net users want, Washington, DC, June (URL: http://www.pandab.org/ECommerce%20Exec.%20Summary.html). WIPO. 1999. Patent Cooperation Treaty registers record growth in 1998, World Intellectual Property Organisation, Geneva, Update 99/49, 12 February.

76

2. Japan: a turning point for the research system

Agency for the Diffusion of Technological Information (ADIT)

2.1. Introduction
The success of the Japanese economy as an exporting power in the 1980s resulted from diverse factors, such as the application of quality management methods and production automation. Japanese consumers are known for their penchant for new products and they drove companies to innovate; some of the products tested in the home market later gained world success as well. As the Japanese economy accumulated export surpluses, the financial sector was able to develop some slack. Surplus funds fuelled a bubble economy in which excess demand increased property prices. As the bubble burst, the value of loan collaterals declined and some of the debtors became unable to service their loans. Japan entered a period of financial crisis which was allowed to simmer for years until, in 1998, the Asian crisis created an unavoidable necessity to take stock and make reforms. To its regret, Japan found that it had squandered a large part of the benefits of its technology-driven export success.

2.2. New strengths in basic research

In 1998, the Japanese economy was struck by its worst recession since the Second World War. In the midst of the depression, intensified by the Asian crisis, in May 1998 the government launched a spending programme designed to kick-start a recovery. There was extra financing for science and technology as well, even though in the original budget for the fiscal year 1998 the combined science and technology spending was practically the only area in which allocations had been increased (STA 1998a, 1998b). In Japan, a society already finely tuned towards the future, RTD is seen as a means of changing the very foundations of the economy rather than as a mere factor contributing to economic growth. As the Minister for Science and Technology pointed out in his speech to the American Association for the Advancement of Science in May 1998, Japan would like to be a nation geared towards science and technology. While applied research has been an undeniable strength of the Japanese innovation system, the Japanese have criticised themselves for lacking achievements in basic research. In 1996, the Japanese Government stated that basic research is not only a basis for innovative development in science and technology, but valuable as intellectual property for all humans to share. The target was set to boldly challenge unknown fields in science and technology

77

(Government of Japan 1996). By 1998, the results of this quest were coming into fruition as first-rate findings in basic research: the discovery of a new (non-A, non-B) viral hepatitis by a team of research scientists at the Jichi Medical School, in February; the Superconductivity Research Laboratorys (SRL) development of a membrane that achieves superconductivity at temperatures over 100 K, in March; the discovery by a team of researchers of the Kyoto University (working with the American National Cancer Institute) of the genes that are responsible for the onset of AIDS in HIV virus carriers, in May; the evidence supplied by a group of scientists of the Tokyo Institute of Cosmic Ray Research (working with the Americans in the impressive experimental facility at Kamiokande) proving that neutrinos have a mass, in June; and the cloning of a calf from cells taken from the skin of an adult bulls ear at the Kagoshima Prefectural Cattle Breeding Development Institute, in August.

Two of the strengths of the Japanese research system are the existence of broad mixed consortiums (academia, government and industry) and the programming of huge budgets over long periods of time, up to 15 years. Results achieved in research on superconductivity and the development of the helium-cooled high-temperature test reactor bear witness to the strengths of the Japanese RTD system.

2.3. Pressing weaknesses and concerns

Despite the achievements of Japanese scientists, the rest of their society has felt a helplessness towards science and distanced from it. There is also concern whether enough young people will embark on scientific careers in the future. After repeated nuclear power accidents and failures in space, the Japanese science system has been criticised for a lack of adequate evaluations of national programmes. The criticism has not spared academia. The Japanese figures for Nobel prizes, articles published in international journals, and patents filed have been cited as too low in comparison with American and European results, at least when adjusted for the countrys population. In response to the criticism, an interministerial group was set up in January 1998 to promote the evaluation of governmental RTD. The group is expected to draft an annual evaluation report. Besides improving the quality of RTD, the authorities are hoping that the report will increase public support for RTD in Japan. The government has also decided to increase the number of experts in the humanities and social sciences in its decision-making bodies to bridge the growing gap between science and society. In June 1998, it was announced that the government is considering setting up a private evaluation organisation to monitor the quality of the universities and foster greater compatibility between the activities of the universities and the needs of society, in particular the requirements of industry. As a first step, there will be experimental evaluations conducted with the help of the American Accreditation Board for Engineering and Technology (ABET). An accreditation system is to be set up in 2001. 78

Reinforcement of cooperation between academia, industry and national research organisations controlled by various ministries is considered to be a strategic priority. Academia and industry carry out cooperative research within centres for cooperative research. Two more such centres were set up in 1998 bringing the total number to 56. Furthering cooperation requires the repeal of certain regulatory measures. One of the goals is to allow research fellows in academia or government to enter into paid occupations outside their regular jobs. This measure is expected to be completed in 1999. Measures changing rules on patenting and technology transfer were implemented in 1998, and the first technology licensing offices were set up within the universities. The public RTD system remains split between three main ministries: the Ministry of Education (MoE), the Science and Technology Agency (STA), and the Ministry of International Trade and Industry (MITI). Sometimes, competition has caused a redundancy of research efforts and a waste of resources. The situation may be alleviated by the merger of the MoE and the STA, which will take place in January 2001. MITI research institutes will become independent in personnel management and the choice of programmes.

2.4. Conclusion
The ability of the Japanese economy and society to adapt to changing circumstances is already legendary. As a result of the oil crises, Japan halved its consumption of oil relative to its GNP between 1973 and 1990 (STA 1996: 56). Similarly, the Japanese exporters were able to overcome the effects of the rapidly rising value of the yen in the late 1980s. As a result of these crises, Japan has gained a lot of experience in overcoming challenges that would paralyse national economies with lesser stamina. That is why it can be expected that the Japanese economy will also emerge strong from the financial crisis of 1998. The year 1998 was a turning point for the organisation of the Japanese RTD system. Tangible signs emerged of the countrys determination to improve the current system: the actions to reach out to the public and the inclusion of a social perspective into RTD policy; the setting-up of evaluation systems; the greater freedom and flexibility granted to research scientists.

A key issue is whether Japan will be able to meet the challenges of the 21st century effectively. Some analysts have pointed that the long sought-for rapprochement between academia and industry may impinge on the independence of academic research, hamper the unfettered quest for knowledge, and jeopardise further advances in basic research. While research budgets on strategic topics, such as new energy sources (including nuclear energy), the environment, life sciences, marine resources, and new information and communication technologies, have been increased, the spending may also reflect an inability to initiate in-depth structural reforms.

79

References
Government of Japan. 1996. Basic plan on science and technology, Cabinet Decision, 2 July (URL: http://www.sta.go.jp/policy/kihonkeikaku/basicplan.html). STA. 1996. White Paper on science and technology, Science and Technology Agency, Japanese Government, Ministry of Finance Printing Office, Tokyo. STA. 1998a. Third addon budget resume on science and technology 98, Science and Technology Agency (URL: http://www.sta.go.jp/policy/seisaku/81208.html). STA 1998b. Science and Technology 99 budget resume, Science and Technology Agency (URL: http://www.sta.go.jp/policy/seisaku/81228.html).

80

3. China: a national innovation system in the process of formation

Qiwen Lu and William Lazonick Euro-Asia Centre, European Institute of Business Administration (Insead)

3.1. Introduction
The renewal of Chinas science and technology (STD) system has been an important part of the nations economic reform agenda that was launched 20 years ago. The goal has been to create a national STD system that supports economic development. The onset of the economic crisis in Asia made it all the more clear to the Chinese that the development of STD underpins Chinas prospects for sustainable economic growth. Hence, the adoption of a new national strategy that emphasises a dual transition a transition from a planned economy to a market economy combined with a transition from extensive growth to intensive growth. Under the slogan Science and technology for a prosperous China, the new strategic thinking makes the further development of STD in China a matter of utmost urgency. To understand the progress of the Chinese STD system over the past two decades and the prospects for an acceleration in that progress over the coming years, one must recognise that China had developed a considerable STD capability under the old central planning system. The major problem with the old system was a segregation of the STD system from commercial application. Thus, a prime task of the reform process has been to transfer national STD resources into the so-called battlefield of economic development. In this endeavour, the government has met with considerable success, especially over the past decade.

3.2. A new national system in formation

A recent government survey of national research institutes, numbering more than 800, reveals a fundamental change in the orientation of research activities (Peoples Daily 1998a). Government budgetary grants as a proportion of the total funding of these institutes has decreased from more than 70 % a decade ago to about 20 % now. On average, the national research institutes now derive a majority of their research funding from marketoriented research activities. The extent of the transition from State-based to market-based funding is quite uneven across institutes. Some 42 % of the surveyed institutes now derive their funding almost exclusively from market-related activities, about 24 % from mixed sources, while 34 % still rely heavily on government funding. The differentiation reflects a division of labour among institutes doing basic research, applied research and technology development, and the commercialisation of technology.

81

The evolution of the division of labour is the result of State-led restructuring of the STD system so that it integrates government planning in the supply of STD resources with market-driven demand for these resources. In the economic transition process, the Chinese Government has been highly proactive in allocating resources to an organisational and institutional infrastructure that can ensure that science and technology activities serve the requirements of national social and economic development. The result of this integration of planning and the market in an era of rapid economic growth and social change means that a unique national innovation system is taking shape. The new system consists of an organisational continuum of national STD programmes, ranging from basic research to industrial RTD, complemented by institutional devices that facilitate the implementation and integration of the programmes. Among the national STD programmes are the Climbing programme (basic research), the 863 programme (hightech research and development), the Torch programme (high-tech commercialisation), and the Spark programme (technologies that serve agriculture and small rural enterprises). The organisational structure of the STD system includes national key laboratories for the basic research programmes, national engineering centres for the high-tech research programme, as well as corporate RTD centres and high- and new-tech developmental zones for technology commercialisation. The new Chinese STD strategy is already generating positive results. Take, for example, the 863 programme, which is a medium- to long-term project aimed at building national capabilities in selected strategic technology areas for the first decades of the 21st century. This programme has already produced more than 400 usable advances in research in the areas of information technology, automation technology, biotechnology, energy technology and new materials (Chinese Material Information Centre 1997). Similarly, the Torch programme has to date implemented more than 10 000 product development projects that have generated CNY 120 billion in products and CNY 1.7 billion in exports (Peoples Daily 1998b). The reforms of the Chinese Academy of Sciences are dealt with in the box below.

The first phase of reform under way In August 1998, the top leadership of the Chinese Academy of Sciences (CAS) decided to launch the first phase of a vigorous effort to renew the structures and management practices of the Academy. The plan will be implemented in three phases over the next 13 years. The first-phase targets research institutes which have established a solid reputation in science and have demonstrated an ability to reform their practices. These institutes employ about 30 000 researchers. One third of the staff are expected to retain their jobs, while one third will be forced into retirement. The remaining third will be offered new jobs, sometimes in research establishments serving industrial enterprises. A director of the CAS has been quoted as urging government departments to abandon

82

policies which discourage CAS institutes from seeking financial support from businesses. The affected research institutes will be strengthened by hiring qualified young people and reforming management practices. The responsibilities of the remaining senior managers will be redesigned so that they will be able to concentrate better on managing research rather than taking care of their employees housing needs, for instance (Swingbanks and Nathan 1998). In 1998, the CAS had a total of 123 institutes and 68 000 researchers. In about one year hence, the number of institutes is to be cut to 80. The opposition from affected groups was described as fierce (China Daily 1998). It remains to be seen whether the next phases of reforms targeting less advanced institutes will be even more thorough in China. -J.L.

3.3. Progress in information technology and telecommunications

The formation of a national innovation system capable of market-oriented research has resulted in the upgrading of Chinas industrial competitiveness. The most notable successes have occurred in the information technology industries, including the computer and telecommunications industries. Throughout the 1980s, the Chinese computer market was negligible. When the worlds leading computer companies finally saw the potential of Chinas market in the early 1990s, their entry effectively wiped out the existing domestic manufacturers, most of which were traditional State-owned enterprises. Since then, in a period of only six years, Chinese companies have staged a comeback in what has been the worlds fastest-growing computer market. These companies are high-tech enterprises with close ties to national research institutions (Lu 1999a, 1999b). The market share of Chinese domestic producers increased from 30 % in 1990 to more than 60 % in 1997 (Business Week 1997). China is now Asias second-largest computer market, and, since 1991, has changed from a net importer to a net exporter of computer electronics products (Ministry of Electronics 1998). While exports of computer goods increased almost 20-fold between 1991 and 1997 from USD 450 million to USD 8.7 billion the trade surplus in these products has widened from less than USD 40 million to more than USD 4 billion over the same period. These exports are not limited to lower-end computer parts and components. For example, China now leads the world in pictographic language information processing technology, and has dominated Chinese-language publishing systems markets throughout the world (Lu and Lazonick 1998). An even more dramatic story can be told about the telecommunications industry. Four years ago, domestic firms were barely visible in the market, even though China was already one of the fastest-growing telecommunications markets in the world. Over the past two 83

years, a handful of Chinese firms have taken nearly half of the huge Chinese telecommunications equipment market from big foreign companies such as Nokia, Ericsson, NEC and others. These companies have invested billions in China. What is remarkable is that it was technological strength rather than lower labour costs or government protection that enabled the Chinese companies to capture these markets. As an example of the technological catch-up, two Chinese companies are already testing versions of a 1 800 MHz GSM switch, which leading multinational firms have only just begun to sell (The Economist 1998).

3.4. Two major problems: corporate RTD and venture capital

China, however, faces two major problems in its attempts to further incorporate science and technology into its industrial development. One problem is the weakness of corporate RTD among traditional State-owned enterprises (SOEs). These companies have lacked both incentives and resources to invest in RTD. Now market competition has increased the incentives for these companies to innovate, while the consolidation of them into enterprise groups may permit the concentration of resources needed to strengthen corporate RTD. In addition, the current government initiative to give tax incentives to about 100 RTD centres among Chinas largest enterprises (mainly SOEs) could help to overcome the corporate RTD bottleneck over the medium to long term. The second problem is a shortage of capital for new high-tech ventures. Chinas success in the IT industry is largely a result of new high-tech ventures spinning off from STD research establishments. Nevertheless, the creation and expansion of new ventures have been hindered by a shortage of capital for these purposes. There are hopes that the rapid growth of stock exchanges in China will entice venture capitalists and technical personnel to come together in new ventures that can eventually go public. In addition, changes in laws and regulations governing the financial sector, along with favourable tax treatment, are seen as ways of creating incentives for the mobilisation of venture capital. An important step in this direction is the recent agreement between the Torch programme coordinating centre under the State Science and Technology Commission (SSTC) and one of the largest Chinese security firms, United Security Co., to create a venture capital fund (Peoples Daily 1998b).

3.5. Conclusion
Yet given all these achievements, the general assessment of the status of the Chinese STD system by the national STD leadership remains negative. To a certain extent, this attitude reflects the leaderships sense of urgency in developing an indigenous STD base. They realise that the international competitiveness of the Chinese economy and also issues of national security hinge on the improvement in the level of science and technology that can be achieved in a short period of time. A major lesson that the Chinese leaders have learned from the current Asian economic crisis is that long-term sustainable economic growth requires that China develop its own science and technology capabilities. At the moment, the attention of the Chinese leadership has been absorbed by a continuous deterioration in the economy resulting from the Asian crisis. But they recognise that over 84

the long-run the progress of Chinas economy and society depends on a continued and heightened focus on technology development.

References
Business Week. 1997. Going toe to toe with Big Blue and Compaq, 14 April. China Daily. 1998. CAS set to undergo a structural reshuffle, 21 August. Chinese Material Information Centre. 1997. 28 September (URL: www.chimeb.edu.cn). Lu, Q. 1999a (forthcoming). Learning and innovation in the Chinese information technology industry: Emerging organisational arrangements in the process of market transition, International Journal of Technology Management. Lu, Q. 1999b (forthcoming). Chinas leap into the information age, Oxford University Press. Lu, Q. and Lazonick, W. 1998. Organisational transformation and technological innovation in Chinese electronic publishing: The Founder Group, Insead Euro-Asia Centre Research Series, No 52, April. Ministry of Electronics. 1998. Chinese Electronics Yearbook. Peoples Daily. 1998a. The science and technology system has transformed, 8 June. Peoples Daily. 1998b. Torch programme centre signed contract with United Security, 15 July. Swingbanks, D. and Nathan, R. 1998. Massive jobs shake-up as China reorganises science academy, Nature, 394, 20 August, p. 710. The Economist. 1998. Silicon Valley, Inc., China, 27 June.

85

4. Russia: laying new foundations for research and innovation

Leonid Gokhberg Centre for Science Research and Statistics (CSRS), Russia

4.1. Introduction
The current situation in the Russian RTD sector reflects the impact of economic, social, and political changes associated with the dramatic transition from the Soviet Union to the Russian Federation and from central planning to a market system (Gokhberg et al. 1997: 19-21). The collapse of the Soviet Union brought about political and economic reforms, and the introduction of the market system gave new qualitative characteristics to the Russian economy. The subsequent economic decline resulted in an increasing burden on the national budget, and, consequently, it became impossible to maintain government RTD appropriations at their previous level. The situation was exacerbated by the poor financial position of enterprises which consequently reduced their research and innovation activities. Almost 67 % of the Soviet RTD personnel and over 72 % of the total RTD expenditure in the USSR was placed in Russia, but the Soviet institutions in Russia were designed to serve all of the 15 republics. The Russian contribution to the Soviet RTD in terms of expenditure was five times greater than that of Ukraine, which ranked second among the republics. After the break-up, a number of research institutes, industrial RTD units, and special facilities such as the space-launching site in Baikonur and the Crimean and Armenian observatories found themselves without proper links to Russian research centres. The USSR Academy of Sciences which functioned as a single administrative entity was dissolved. Inter-republic research programmes were discontinued, and RTD contracts between institutes and enterprises in different republics were cancelled. Another factor that has transformed the RTD environment in Russia over recent years has been the decentralisation of decision-making. The role of the State has been reduced, while the influence of industrial associations, enterprises, and local authorities has increased. At the same time, unstable political conditions have adversely affected the preparation and implementation of strategic and operational decisions in all fields of public policy, including STD. Growing international research cooperation has also influenced Russian RTD efforts. As stated in an OECD report on Russian RTD, many Russian scientists, especially in the younger generation, are quickly becoming integrated into the international scientific community. The changed situation has also confirmed that Russia does indeed possess considerable scientific talent, and this is a source of optimism for the future (OECD 1994: 21).

87

4.2. Research expenditure decimated

Reflecting high inflation, at current prices Russian gross domestic expenditure on RTD (GERD) grew almost 2 000-fold between 1990 and 1997, but in real terms the expenditure fell to less than a third of the 1990 level as shown in Table 4. Table 4. Gross domestic expenditure on RTD (GERD) (billions of rubles) 1990 13.1 1991 20.0 1992 140.6 1993 1317.2 1994 1995 1996 1997 5,146.1 12,149.5 19,393.9 24,449.7

GERD at current prices GERD at constant 1989 prices

10.9

7.3

3.2

3.1

2.9

2.4

2.6

2.8

Source: Centre for Science Research and Statistics, 1999.

Before the drastic cuts during 1990-92, the Russian RTD expenditures were comparable to those in France and the UK. In 1996, the country was falling behind Italy, Canada, South Korea, China and India. Currently, Russian RTD expenditures are close to those in the Netherlands, Sweden, and Australia (European Commission 1997). The preliminary estimate of GERD for 1998 is RUB 26.6 billion, or 1 % below the 1997 level in real terms. The downsizing of RTD in Russia has been accompanied by some changes in the sources of funding. Until the early 1990s, an extremely centralised system of RTD financing was in force. During the period 1989-93, only about 4 % of GERD came from enterprises own funds, while the rest was financed from government allocations (Gokhberg et al. 1997). Funding derived from levies voluntarily paid by enterprises at the rate of 1.5 % of their sales was introduced in 1992 and since 1994 has accounted for 6 to 7 % of GERD as seen in Table 5. In 1997, the value of the government budget appropriations on RTD was only 22.4 % of that in 1991. Such a decline exceeded all possible economic gains from institutional reform. Furthermore, RTD was one of the major victims in the struggle against the budgetary deficit, and non-fulfilment of planned government research appropriations has been chronic since 1993. In 1998, the actual amount spent on civil RTD was only 78 % of what was envisaged in the initial budgetary proposal.

88

Table 5. Percentage distribution of RTD expenditure by sources of funding 1994 Government Funding from the 1.5 % levy Business enterprise sector Higher education sector Private non-profit sector Funds from abroad
Source: Gokhberg 1998b: 24.

1995 61.6 6.7 26.9 0.3 0.0 4.6

1996 62.1 6.2 25.3 0.3 0.6 5.6

1997 60.9 6.0 24.6 0.2 0.8 7.4

62.3 6.3 29.0 0.4 0.1 2.0

4.3. Number of research staff halved

Between 1990 and 1997, RTD employment decreased by 52 % as shown in Table 6. Most of the staff reductions resulted from voluntary departures of qualified RTD professionals to the business sector. This has been described as an internal brain drain. Well-paid positions were offered for highly qualified scientists and engineers, and now many managers of banks, industrial groups, and other business ventures have science degrees.

Table 6. National RTD personnel (thousands) Total 1990 1991 1992 1993 1994 1995 1996 1997 1,943.4 1,677.8 1,532.6 1,315.0 1,106.3 1,061.0 990.7 934.6 Researchers 992.6 878.5 804.0 644.9 525.3 518.7 484.8 455.1 Technicians 234.8 200.6 180.7 133.9 115.5 101.4 87.8 80.3 Supporting staff 512.5 416.6 382.2 379.4 291.3 274.9 260.0 244.9 Others 203.5 182.1 165.7 156.8 174.1 166.1 158.1 154.3

Source: Centre for Science Research and Statistics, 1999.

The Russian RTD system still employs over 900 000 people, and the resulting 1997 figure of 143 people being engaged in RTD per 10 000 people in employment is broadly comparable with leading industrial nations. This can be seen as confirming the view that human potential still remains the major asset of Russian science.

89

Almost 60 % of the researchers who left Academy institutes in 1991-93 were younger than 40, and the average age of the remaining research staff has been increasing. The proportion of researchers aged 50 or more is 35 %; almost one tenth are older than 60. But the proportion of researchers with higher degrees increased from 14 to 24 % during 1990-97 because, in the first place, there was a growth of 30 % in the number of Doctors of Science engaged in RTD, and, secondly, many of the younger staff who had left did not have higher degrees. Russias participation in international RTD has attracted researchers abroad. The number of Russian researchers working abroad under contract rose to 4 100 by 1996 according to recent CSRS data. Nearly one third of them were physicists, another 17 % biologists, with chemists, engineers and humanists each constituting 11 to 12 %. These scientists originated from 280 research institutes and made up 2.6 % of their research staff. Most Russian researchers going abroad headed for the United States (27 %), Germany (17 %), France (9 %), or the UK and Italy (5 % each). Of the scientists sent abroad, 44 % were under 40 years of age, 20 % had a doctorate in science and 50 % were candidates of science.

4.4. Areas of excellence remain

Russia, with its long scientific tradition, has been one of the major contributors to the human knowledge base. The Soviet Union had an RTD system which was among the largest in the world and accomplished impressive achievements in basic research and defence-oriented technologies. The country was isolated from the rest of the world for decades and invested tremendous resources in RTD to further its economic independence, military power and industrialisation. Russian scientists won several Nobel Prizes, and many others were pioneers in their field although they remained unknown abroad for reasons of secrecy. Today, the main areas of excellence in Russian science include physics, astronomy and space research, chemistry and new materials, life sciences, and earth sciences, as well as mathematics and computer sciences. The most recent achievements include the discovery of the long-lasting 114th element of Mendeleevs periodic table, new impulse neutron equipment, as well as thermonuclear equipment, and a safe influenza vaccine. Particular areas of Russian technological proficiency are hydraulic and gas turbines, shipbuilding (including nuclear ice-breakers and hydrofoils), applications of hightemperature superconductivity, applications of lasers in medical science, and communications systems. The latest developments include drive gears made from a memory material, a high-frequency plasma scalpel, lavistors (radiation-proof semiconductor equipment), and crystalline light conductors of high elasticity. Some of these products have resulted from defence conversion programmes.

90

4.5. Renovation of the research infrastructure

The restructuring of the RTD infrastructure in Russia began in the early 1990s with the formation of State research centres (SRCs). The status of SRC was assigned to leading research institutes that conducted world-standard research, employed highly qualified staff, and possessed unique research facilities. Such institutions continue to be regarded as entities of federal importance. The list of SRCs is reviewed by the government every second year. By the beginning of 1998, there were 56 State research centres in Russia as shown in Table 7. Table 7. State research centres by field of research in Russia in 1998. Field of research Nuclear physics and atomic power generation Chemistry and new materials Aviation Shipbuilding, navigation, and hydrophysics Medical and biological problems Biotechnology Oceanology, meteorology, water-provision, and engineering hydrotechnology Informatics and instrument-making Machine-building Optical electronics, laser systems, robot technology, and special chemistry Agro-industrial complex Mining and metallurgy Construction Total
Source: Ministry of Science and Technology of the Russian Federation.

Number of SRCs 7 7 4 6 2 6 3 5 4 5 2 4 1 56

During the Soviet era, most of the SRCs were engaged in defence RTD and since then they have had to find new customers. The centres that have most successfully adjusted to the market environment are those that have integrated with universities or have been able to find applications for their products. Several SRCs in chemistry have been able to start to exploit new market niches. One research institute that specialised in rocket-related research has developed dozens of medicines based on germanium. Another that dealt with explosives now develops highly efficient solutions for treating childrens diseases. As a result of the political and economic changes, Russian RTD has become more goal-oriented. Cuts in defence-related programmes and the conversion of defence enterprises to civilian manufacture reduced the proportion of defence-related RTD expenditure from 43 % in 1991 to 26 % by the beginning of 1995. Among civil

91

objectives, industrial programmes and the general advancement of research are emphasised and receive 35 and 13 % of the total respectively. Health research accounts for just 3 % of GERD, and environmental research less than 2 %. Our analysis of Russia and other central and east European economies in transition suggests that such major objectives as health and the environment can be expected to obtain greater priority in the near future (European Commission 1997). In the USSR, civilian research was mainly carried out in research institutes that were independent of enterprises and universities, and this is still the case in Russia. Along with institutes conducting research as their primary activity, there are also units specialising in development (such as design, construction projects, and experimental work), and they too have been independent of industrial enterprises. Only a limited number of universities and industrial enterprises combine RTD activities with education or production. At the beginning of 1998, the Russian RTD establishment comprised more than 4 100 units. Since 1990, their number has decreased by 12 % primarily due to the reduction in industrial RTD in design and project organisations. Independent research institutes and design organisations accounted for 72 % of all RTD institutions. In employment, the domination of research institutes became more pronounced as they provided 70 % of RTD jobs in 1997 while the figure was 55 % in 1990. The distribution of Russian RTD institutions between the government, business enterprise, higher education, and the private non-profit-making sector is shown in Table 8. The RTD units of the business enterprise sector comprise establishments of industrial enterprises as well as independent RTD organisations. The units in this sector constitute over 2 300 organisations and form the majority of the RTD establishments in Russia. Industrial enterprises traditionally played a small role in national RTD. With insufficient resources and uneven development, the so-called enterprise RTD is now mainly directed towards very specific applications, including adapting the fruits of external research to specific tasks. The slight changes in the numbers of units in this sector reflect trends in production and privatisation, which removed many institutions from being directly administrated by ministries and departments and placed them in the hands of industrial associations or financial and industrial groups. Privatisation mostly affected the civilian RTD organisations. The government sector incorporates 30 % of domestic RTD institutions. It consists of the RTD units of the Russian Academy of Sciences and of other public scientific academies (for agriculture, medicine, education, architecture, and the arts), as well as of research institutes attached to federal and local authorities. The number of RTD units of the academies had increased to over 800 by the beginning of 1998.

92

Table 8. Russian RTD institutions by sector in 1994-1997. Sector Government sector Business enterprise sector Higher education sector Private non-profit sector Total 1994 1150 2300 511 7 3968 1995 1193 2345 511 10 4059 1996 1202 2351 548 21 4122 1997 1223 2336 543 35 4137

Source: Centre for Science Research and Statistics, 1999.

The isolation of higher education from mainstream RTD and the considerable financial strain on universities and colleges have resulted in a reduction in the scale of research they conduct. Furthermore, newly established private universities are not engaged in research at all. At the beginning of 1998, only 46 % of Russian higher education institutions engaged in RTD. If this trend continues, there may be irreversible consequences for both RTD and professional training. The formation of the private non-profit-making RTD sector is a new phenomenon in Russia. The sector is still very small, but it can be expected to grow as voluntary associations, professional scientific societies and charity foundations expand their research activities. During the 1990s, more than 60 new voluntary academies of science were established, and approximately 50 scientific societies and academies were incorporated into the Union of Scientific Societies.

4.6. Some signs of improvement in the innovation climate

Bridging the gap between RTD and industry is one of the most urgent challenges of the transition period in Russia. Federal and regional authorities are trying to accomplish this by building infrastructure for innovation and by supporting various forms of innovation activities. The level of innovation activity measured by the proportion of innovating enterprises in the total fell drastically from 60 to 70 % in the 1980s to about 4.7 % in 1997. For 1998, the figure is estimated to be less than 3.7 %. The highest levels of innovation activity are achieved mainly in export-oriented sectors (manufacture of chemicals, refined petroleum products and ferrous metallurgy). Enterprises in these fields are not necessarily distinguished by their high RTD propensity but the conditions in which they operate sustain relatively long-term investments. A recent survey shows that over the last few years technological innovation has been driven by the increased efforts of enterprises to meet consumer requirements (Centre for Science Research and Statistics 1998b). Innovating enterprises attach major importance

93

to the development and introduction of product innovations. The aim is to maintain traditional markets, create new Russian markets, enlarge the product range and improve the quality of products. Expenditure on technological innovation is negligible considering the scale of Russian industry. In 1997, it amounted to 6 % of total investments in industry. In funding innovation activities, enterprises largely rely on their own resources in spite of the companies financial constraints. In 1997, about 80 % of innovation expenditure was financed from enterprises own funds, while government and non-budgetary funding were between 5 and 7 % each. Moreover, innovation activity in Russian industry has become somewhat attractive for foreign investment, as it accounted for 8 % of the expenditure. The Russian federal authorities have implemented several programmes aimed at improving the innovation environment. The interdepartmental programme Activation of innovation in science and technology furthers the development of the marketoriented national innovation system. One of its measures is the establishment of local innovation centres, technoparks, and business incubators. Another measure introduces incentives for new small businesses commercialising STD. Thanks to the interdepartmental programme Development of the national computer telecommunications network for science and higher education over 1 000 research institutes and universities now have access to the Internet. The Ministry of Science and Technology (MST), in cooperation with the Soros Foundation, is building a network of Internet nodes in 32 regional universities. In 1997, regional innovation and technology centres funded by both federal and regional budgets were established in Moscow, St Petersburg, Novosibirsk, Kazan, and Ekaterinburg. Another four innovation centres were set up in Novosibirsk, Tomsk, Samara, and Zelenograd in 1998 as part of a joint project financed by the EU and the Ministry of Science and Technology. In order to capitalise on dual-use technologies, a network of technoparks will be set up in science towns that were formerly closed for defence reasons. At present, there are 60 technoparks in Russia. The government has plans for mortgage mechanisms, other types of credit instruments, financial risk insurance for innovation projects, and the creation of venture foundations. The government will participate in venture foundations and will provide guarantees for private investments in innovation and high-tech production. The first such foundation has been established by the Ministry of Science and Technology in collaboration with the Ministry of Finance and the Ministry of the Economy.

4.7. Setting goals for Russian research

In the transition to a market economy, initial measures undertaken by the government were mainly aimed at resolving immediate difficulties and safeguarding the countrys RTD resources in the new harsh economic climate. Since then, there has been a shift towards a more considered STD policy that takes into account national socio-economic goals and is linked to macroeconomic and industrial programmes. Science and 94

technology have been recognised as having strategic importance for economic and social progress. One of the latest strategic documents on STD policy Conception of reforming Russian science in 1998-2000, approved by the government in 1998 declares that the restructuring of the national STD system is a necessary requirement for the creation of a technology base that is, in turn, essential for economic growth and the prosperity of the nation. Overall, STD policy is formed as a result of consensus between various policy-making bodies (Gokhberg 1999). The practical issues of national policy are the domain of the Ministry of Science and Technology, which coordinates overall decision-making. One of the main objectives of the Ministry is to develop a comprehensive system of internationally comparable RTD and innovation indicators to assist decision-making. The Centre for Science Research and Statistics was established in 1991 to prepare statistics and analyses on RTD and innovation activities in Russia. In 1998, at the request of the MST, the CSRS assessed promising technologies with the involvement of nearly 1 500 experts. The highest rankings were received by such technologies as nuclear power generation, technologies for environmental monitoring and exploring mineral resources, non-conventional technologies for processing raw materials, recombinant vaccines, electron and plasma technologies, polymers, and catalysts, as well as systems for the recognition and synthesis of speech, text and images. The next step will be Russian technology foresight which will be implemented by the CSRS in 1999. Subsequently, government priorities for STD will be revised within the framework of the interdepartmental programme Prospects for STD in Russia.

4.8. International cooperation intensifies

International STD links of the Soviet Union were mostly limited to the Council for Mutual Economic Assistance (Comecon) and allied countries. From the very beginning of its independence, Russia adopted a policy of international openness. It was signified by the creation and development of international programmes, the participation of Russian scientists and engineers in both multilateral projects and those of other nations, international exchanges of researchers, and the establishment of offices, research centres and joint ventures by foreign companies in Russia. The result has been a gradual transition from aid programmes to mutually beneficial STD relations. Prospective cooperation areas include fields in which Russia still possesses state-of-the-art expertise, such as high-energy physics, high-temperature superconductivity, chemistry, new materials, and biotechnology. Naturally, Russian STD transactions with particular countries significantly differ depending on broader bilateral political and economic relations, historical traditions, and also on the degree of complementarity in RTD, and readiness to establish direct links and partnerships (Gokhberg 1996, 1998a). Russia has concluded about 100 intergovernmental agreements and created links in a wide range of STD fields with over 60 countries. Cooperation with the United States 95

is currently based on the intergovernmental agreement signed in Moscow in December 1993 and comprises a series of joint projects in power engineering, space research, transport, ecology, health, and geology. The US National Science Foundation has set up dozens of joint studies with Russian participants, and Russian research institutes have signed more than 250 agreements with laboratories in the United States. A rather special feature is the collaboration in dual-use technologies. The two countries have started a joint project on acoustic thermometry of the ocean climate; in addition, the Russian Space Agency has a number of bilateral activities with NASA. Numerous charity foundations from the United States have supported Russian science. The US Civilian Research and Development Foundation targets defence and nuclear laboratories and supports studies in high-energy physics and nuclear security, chemistry, laser technology, environmental protection, and space research. In the 1990s, STD cooperation with Germany has also become more extensive. Joint projects cover space research, power engineering, safety of nuclear reactors, communications, life sciences, and physics. The Max Planck and Fraunhofer Societies have established independent STD contacts with their Russian counterparts. Largescale training programmes in innovation have been a focus of support given by German local authorities. A German-Russian bureau on innovation activity was established in Berlin with an affiliate in Moscow. The first meeting of the Intergovernmental Russian-British Committee for STD Cooperation was held in London in May 1997. The focus of cooperation will be on the commercialisation of technologies, protection of intellectual property rights, and easing visa and customs procedures. Collaboration with Japan has been promoted in the areas of plasma physics and nuclear fusion, high-energy physics, aeronautics, and agriculture. Other active partner countries in the STD area include France, Italy, Finland, the Netherlands, and Israel. The Russian Government is endeavouring to broaden STD cooperation with EU countries. The International Association for the Promotion of Cooperation with Scientists from the Independent States of the Former Soviet Union (INTAS), established in 1993, involves the European Commission, 15 EU countries, Iceland, Israel, Norway, and Switzerland. INTAS focuses its support on joint research projects and scientific networks, covering a spectrum of sciences. The scale of the INTAS activities is impressive: it involves over 5 000 research teams from more than 30 countries. The Tacis (technical assistance for the Commonwealth of Independent States) programme began in 1991 as an initiative for the CIS countries and Mongolia. It seeks to foster the links between EU and partner countries. Tacis provides grant funding for feasibility and pre-investment studies with an emphasis on structural reforms, nuclear safety and the environment, as well as institutional reforms, including those in STD and innovation. Since 1994, when the Russia-EU agreement was signed, Russian researchers have taken part in the projects of the fourth framework programme, for example, in the INCO-Copernicus programme. A joint EU-Russia committee has prepared a large-

96

scale agreement on STD cooperation which is expected to be officially signed in 1999. The document will regulate the protection of intellectual property rights, technology transfer, and the development of STD information infrastructure for joint projects. Broader opportunities for EU-Russia STD cooperation are provided by the new regulations for the fifth framework programme.

4.9. Conclusion
The achievements of Russian science and technology encouraged the expectation that once freed from the rigidities of central planning system research would provide the basis for high-technology exports and economic growth. The Russian Government expressed its desire to promote RTD and innovation as a foundation for Russias revival and sustainable development, for strengthening national intellectual potential, economic growth, and a higher standard of living. However, during the first few years of transition, macroeconomic problems discouraged all forms of long-term investments, and industrys ability to sustain innovation declined. In some sectors of industry, the decline of RTD capacity has been so profound that it may jeopardise future recovery in these sectors when the general economic conditions otherwise improve. Furthermore, innovation also requires good manufacturing technologies, marketing skills and aggressive competitive strategies capabilities neither developed nor prized in the former Soviet Union. After having reorganised its RTD infrastructure, Russia is gradually developing implementation mechanisms for its evolving science and technology policies.

References
Centre for Science Research and Statistics. 1998a. Innovation in Russia Data book, Moscow. Centre for Science Research and Statistics. 1998b. Technological innovation in Russia, Moscow. Centre for Science Research and Statistics. 1999. Russian science and technology at a glance: 1998, Moscow. European Commission. 1997. Second European report on S & T indicators, Office for Official Publications of the European Communities, Luxembourg, Chapter 8a. Gokhberg, L. 1996. The Commonwealth of Independent States, in World Science Report 1996, Unesco, Paris. Gokhberg, L. 1998a. The Commonwealth of Independent States, in World Science Report 1998, Unesco, Paris.

97

Gokhberg, L. 1998b. Scientific potential of Russia in the mirror of statistics, Issues of Statistics, No 11, Moscow. Gokhberg, L. 1999. Russia: A science and technology profile, The British Council, Manchester. Gokhberg, L., Peck, M. J. and Gacs, J. (eds). 1997. Russian applied research and development: Its problems and its promise, IIASA, Laxenburg, Austria. OECD. 1994. Science, technology and innovation policies: Federation of Russia, Vol. I, Paris.

98

Addresses of contributors
Jorma Lievonen In association with the Group for Technology Studies (VTT) Otsonkallio 3 F 36 FIN-02110 Espoo Finland Tel. (358-9) 455 89 29 Fax (358-9) 45 59 00 11 E-mail: Jorma.Lievonen@vtt.fi Celia Greaves and Tonino Amorelli Centre for Exploitation of Science and Technology (CEST) 5 Berners Road Islington London N1 0PW United Kingdom Tel. (44-171) 354 99 42 Fax (44-171) 354 43 01 E-mail: cgreaves@cest.org.uk; tamorelli@cest.org.uk Seppo Laaksonen Statistics Finland FIN-00022 Helsinki Finland Tel. (358-9) 17 34 36 34 Fax (358-9) 17 34 24 74 E-mail: seppo.laaksonen@stat.fi Huub Meijers Maastricht Economic Research Institute on Innovation and Technology (MERIT) Maastricht University PO Box 616 6200 MD Maastricht The Netherlands Tel. (31-43) 388 38 82 Fax (31-43) 321 65 18 E-mail: huub.meijers@merit.unimaas.nl Marie-Laure Spaak Agency for the Diffusion of Technological Information (ADIT) 2, rue Brulee F-67000 Strasbourg France Tel. (33) 388 21 42 42 Fax (33) 388 21 42 40 E-mail: mls@adit.fr 99

Petra Dux and Heinz Eickenbusch Verein Deutscher Ingenieure (VDI) PO Box 10 11 39 D-40002 Dusseldorf Germany Tel. (49-211) 621 44 56 Fax (49-211) 621 44 84 E-mail: duex@vdi.de Petra Dux and Anette Schmitt Verein Deutscher Ingenieure (VDI) PO Box 10 11 39 D-40002 Dusseldorf Germany Tel. (49-211) 621 44 56 Fax (49-211) 621 44 84 E-mail: duex@vdi.de; schmitt@vdi.de Patrick Henry (Project Manager) Agency for the Diffusion of Technological Information (ADIT) 2, rue Brulee F-67000 Strasbourg France Tel. (33) 388 21 42 42 Fax (33) 388 21 42 40 E-mail: ph@adit.fr Qiwen Lu and William Lazonick Euro-Asia Centre European Institute of Business Administration (Insead) Boulevard de Constance F-77309 Fontainebleau Cedex France Tel. (33) 160 72 40 06 Fax (33) 160 72 40 49 E-mail: Qiwen.LU@insead.fr; WILLIAM.LAZONICK@insead.fr Leonid Gokhberg Centre for Science Research and Statistics (CSRS) 11, Tverskaya Street 103905 Moscow Russia Tel. (7-095) 229 16 62 Fax (7-095) 924 28 28 E-mail: gokhberg@minstp.ru

100

About the IPTS

The Institute for Prospective Technological Studies (IPTS) is one of the eight institutes of the Joint Research Centre (JRC) of the European Commission. It was established in Seville, Spain, in September 1994. The mission of the Institute is to provide techno-economic analysis support to the European decision-makers, by monitoring and analysing science and technology related developments, their crosssectoral impact, their interrelationship in the socio-economic context and future policy implications, and to present this information in a timely and synthetic fashion. Although particular emphasis is placed on key science and technology (S & T) fields, especially those that have a driving role and even the potential to reshape our society, important efforts are devoted to improving the understanding of the complex interactions between technology, economy and society. Indeed, the impact of technology on society and, conversely, the way technological development is driven by societal changes are highly relevant themes within the European decisionmaking context. In order to implement this mission, the Institute develops appropriate contacts, awareness and skills for anticipating and following the agenda of the policy decision-makers. In addition to its own resources, the IPTS makes use of external Advisory Groups and operates a network of European institutes (ESTO) working in similar areas. These networking activities enable the IPTS to draw on a large pool of available expertise, while allowing a continuous process of external peer review of the in-house activities. The interdisciplinary prospective approach developed by the Institute is intended to provide European decision-makers with a deeper understanding of the emerging S & T issues, and is fully complementary to the activities undertaken by other JRC institutes.

About the ESTO network

The European Science and Technology Observatory (ESTO) was formally constituted by the Institute for Prospective Technological Studies in February 1997 as a Technology Watch network. The ESTO network comprises 34 institutions with experience in the field of scientific and technological assessment at national level, representing the vast majority of European think-tanks. ESTO members share responsibility for supplying the IPTS with high-quality, up-to-date scientific and technological information drawn from all over the world, facilitated by the networks broad presence and wide range of contacts. Developments are examined from a socio-economic perspective, identifying breakthroughs and trends which may require action at a European level. Activities are targeted at policy-makers and decision-makers within the European S & T sector, in particular the Commission, but information is also available to a wider audience, such as the Member States, non-governmental organisations (NGOs) and industry. Currently, ESTO is engaged in the following activities: contributing to the monthly IPTS Report; producing an annual Techno-economic Analysis Report; developing specific prospective projects intended to act as a trigger for in-depth studies; building thematical networks allowing ESTO and the IPTS to provide rapid responses to specific requests from European decision-makers; fostering the continuous expansion of the ESTO network and the involvement of new members in activities.