Tech needs R&D Funds, Not Government Handouts

PHILADELPHIA — The U.S. government cannot save America's auto industry from imploding. Neither can it save the equity market simply by pouring money into it. Uncle Sam has a huge desire to help, but rescuing Detroit and Wall Street is beyond even its obviously enormous financial capacity. What the equity market and the automotive industry need even more than cold cash is assurance that things will improve. The only action that can set the auto industry and the economy straight is solid product innovation. There's a lesson here for high-tech companies. As the U.S. government ponders offering General Motors Corp. financial assistance to hasten its takeover of Chrysler LLC, some in the high-tech industry wonder whether semiconductor vendors should similarly call on politicians to assist the market with a cash infusion. But like a few banks that weren't run into the ground, technology companies don't need a cash handout. What the industry needs is federal support for basic research and development, and for the government to foster an innovative environment that would be beneficial not just for the industry but also the rest of the global economy. R&D feeds future growth, and it's something technology companies have always been good at--of course, with some backing from the government in areas where the return on investment is lengthy or the period of product development is so extended and loaded with uncertainty that deeper pockets are essential. That process is now in jeopardy on two fronts as the market value of technology companies plummet and the U.S. government—the primary facilitator of some of the industry's most important inventions like the Internet—continues its excessive deficit spending. This public debt will invariably result in cuts to discretionary spending, including R&D assistance to high-tech companies. Even if the U.S. government wants to help the semiconductor industry develop next-generation products or improve its process technology, for instance, it may not be able to do this because a huge chunk of available resources is being sucked up by the financial sector. This is happening as technology companies are being forced to slash operating costs, including R&D expenses, due to weakening demand and the need to conserve cash for all but the most essential functions. Declining market value hurts innovation Falling market valuation for technology companies is going to worsen the situation. High-tech companies have traditionally relied on such mechanisms as stock options, share sales and initial public offerings to fund innovation, attract and compensate experienced staff, fund acquisitions and raise capital for expansionary activities. We will be seeing a dramatic slowdown in such activities. Consider the following: EE Times recently reviewed the stock prices of eight leading technology companies and found the group's market value declined a whopping $724 billion in just the last year, more or less equal to the amount Congress has spent on restoring liquidity to the banking sector. The companies reviewed, including Apple, Cisco, Google, IBM, Intel, Microsoft, HP and Yahoo, are in the top ranks of leading technology innovators, and their respective activities fueled the development of new products that have helped boost economic productivity worldwide. While all of these companies boast considerable cash reserves, it is obvious the sharp decline in their market values will negatively affect their ability to continue funding future product development without some assistance from the government. The same applies to smaller companies, especially startups that have seen their access to seed and operating capital restricted by the tight credit market. It would therefore seem rational that technology companies consider asking Congress for help. After all, the U.S. government should not rescue one economic offspring and let another suffer? However, the industry must not rest its case for governmental assistance on a dubious argument for equitable treatment. It can hardly be truthfully said the high-tech market is facing a systemic problem that is in any way comparable to the structural crisis confronting financial companies, auto makers and the real estate market. High-tech is hurting like the rest of the economy, but its problems are related more to weakness in consumer and corporate demand than a bad bout of financial mismanagement, imbalanced portfolio or restrictions on operating funds. Many tech companies have enough cash to trundle along without a government handout. When the industry was in bad shape at the beginning of the decade, company executives swiftly shuttered unprofitable plants and divisions, consolidated operations across the globe and implemented various cost cutting and productivity-boosting measures. In order to ensure the general economy can continue to benefit from the high-tech sector's ability to introduce productivity enhancement, any new economic incentive package must include funds for extensive R&D activities. Such a move will encourage innovation and foster the introduction of new high-tech products, improve manufacturing efficiency and propel markets on a more solid footing for years to come. Government agencies like the Defense Advanced Research Projects Agency can, as they have in the past, help lead the way. We were pleased to see that the agency has awarded a contract for industry research on next-generation MRAM technology. That's a good start. Certainly, the benefits won't be immediate. On a long-term basis, however, funding basic technology R&D and fostering an environment for product innovation and process improvements will provide a more lasting boost to the economy than a direct cash injection.