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The Government's Role in the Commercialization of New Technologies: Lessons for Space Policy

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The Government's Role in the Commercialization of New Technologies: Lessons for Space Policy HD28 Dewey .M414 ICC"? zi^n.^.r'-: WORKING PAPER ALFRED P. SLOAN SCHOOL OF MANAGEMENT The Government's Role in the Commercialization of New Technologies: Lessons for Space Policy Nancy L. Rose August 1986 MIT Sloan School of Management Working Paper #1811-86 MASSACHUSETTS INSTITUTE OF TECHNOLOGY 50 MEMORIAL DRIVE CAMBRIDGE, MASSACHUSETTS 02139 The Government's Role in the Commercialization of New Technologies: Lessons for Space Policy Nancy L. Rose August 1986 MIT Sloan School of Management Working Paper #1811-86 Prepared for the National Academy of Engineering/Resources for the Future Symposium on Explorations in Space Policy, June 24-25, 1986. I am grateful to Molly Macauley, Larry Summers, participants in the Symposium on Explorations in Space Policy, and especially Jim Poterba for helpful conversations and comments. ABSTRACT The Government s Role in the Commercialization of New Technologies: Lessons for Space Policy Nancy L. Rose August 1986 Private sector interest in emerging space technologies has grown rapidly during recent years. This has been accompanied by an increased government emphasis on commercialization of these technologies. However, the transition from a virtual government space monopoly to viable private space industries is by no means inevitable. Many advocates of government support for commercialization efforts have argued that a number of obstacles, including the high capital costs associated with some space commercialization projects, the potential breakdown of private investment incentives if successful ventures can be easily imitated, and government regulatory policy, may retard private participation in space ventures. Many of the issues that are prominent in discussions of space policy also arose during debates over alternative energy sources, nuclear power, communication satellites, the development of commercial aircraft--even the construction of a transcontinental railroad. This paper draws upon the history of technology development in three of these industries to assess the importance of obstacles to commercialization and to evaluate the success of earlier government policies. The lessons drawn from these case studies suggest caution in extending government support for commercialization of space technologies. 1 Private sector interest in emerging space technologies has grown rapidly during recent years. While this is particularly apparent in the burgeoning commercial satellite industry, private activity extends much further. A number of companies are developing technologies for materials processing in space under joint endeavor agreements with NASA; the transfer of expendable launch vehicles fELVs) and earth observation/ remote-sensing satellites from public operation to private operation is already underway; and one company has expressed interest in replacing Challenger by a pri- vately owned and financed orbiter. Accompanying this expanding private sector interest has been an increased government emphasis on commercializa- tion of space technologies.^ This is likely to be reinforced by federal budgetary pressures, combined with extensive shuttle re-design costs in the wake of the Challenger accident, which may curtail available NASA funding and enhance the attractiveness of private sector financing of space technologies The transition from a virtual government space monopoly to a viable commercial space industry is not inevitable. Many advocates of government intervention in the commercialization of space technologies have argued that a number of obstacles retard private participation in space ventures. These include the high capital costs associated with some space commercialization projects, the potential breakdown of private investment incentives if successful ventures can be easily imitated, and government regulatory ^ See, for example, President Reagan's National Space Policy, announced on July 4, 1982 and Space Commercialization Policy announced on July 20, 1984, and the Commercial Space Launch Act and the Land Remote- Sensing Commercialization Act of 1984. 2 policy. The appropriate government policy toward commercialization of space technologies depends upon the importance of these and many other factors. If, when, and how the government should intervene in the development of private markets are questions with a lengthy pedigree in regulatory eco- nomics. Many of the issues that are prominent in current discussions of space policy also arose during debates over alternative energy sources, nuclear power, communication satellites, and the development of commercial aircraft. There are even strong parallels in the controversies over federal support for the construction of a trans-continental rail network and the use of public capital in canal construction. This paper evaluates a number of the economic arguments which have been advanced to justify government intervention in space commercialization. Section I discusses three such arguments: capital market failure, non- appropriability of prospective returns, and the need to correct government- induced distortions. The remainder of the paper draws upon the history of technology development in a variety of industries to assess these arguments and draw out lessons for government involvement in the commercialization of space technologies. Section II focuses on three particular technologies: commercial aircraft, nuclear powered reactors, and communications satel- lites. It explores the government's role vis-a-vis the private sector in the development of these technologies. Section III uses the lessons of these earlier programs to develop guidelines for national commercial space policies and for successful government commercialization programs more generally. M-'- 3 I. Economic Rationales for Government Intervention This section presents classical micro-economic arguments for government intervention in the development of commercial technologies. This approach presumes that, absent specific imperfections, private markets can be trusted to allocate resources efficiently-- that is, in such a way as to maximize total welfare. The classical economic rationale for government intervention in private markets therefore hinges upon identifying some imperfection or market failure. Efficiency goals certainly are not the only motivation for government intervention. In space policy as in many other areas, political goals such as "national prestige" or "leadership" and "international competitiveness" often dominate policy debates. Economists have no particular expertise in directing policies that are to be pursued for prestige reasons, however, nor is pursuit of such political goals necessarily compatible with the objective of developing efficient commercial markets. Given these considerations, and because many of the arguments for space commercialization policies are couched in terms of shortcomings or failures of private markets, my discus- sion concentrates on possible efficiency rationales for government interven- tion. ^ ^ I focus exclusively on private, as opposed to public or collective, goods and services. Private goods satisfy two conditions: (1) Consumption is exhaustive : if I consume the product, it is unavailable for your consumption. (2) Consumption Is exclusive : if I purchase and consume the product, I can exclude you from also consuming it and receiving its benefits. When consumption is neither exhaustive nor exclusive, the private market will tend to undersupply the good relative to the socially optimal level. Although public goods such as national defense are an important cause of market failure, the standard solution to this type of failure is public provision. My focus on commercial markets therefore rules out these types of goods. 4 In addition, although this section focuses on imperfections in the operations of private markets, it does not imply that market imperfections ipso facto warrant government intervention. Government policies are seldom perfectly constructed or implemented, and they typically introduce a new set of distortions into market operations. Imperfect markets must therefore be balanced against imperfect government. This suggests a higher standard for government intervention than a simple "market failure" test." Three market failure arguments are typically invoked to justify government intervention in the development or commercialization of space technologies.* These are: (1) the inability of private capital markets to finance development of the new technology; (2) non-appropriabiiity of the benefits of private R&D or innovations; and C3) distortions caused by pre- existing government policies or regulations that interfere with development of the new technology. I analyze each of these in turn. ^ See Schmalensee (1980) ahd Eads (1974) for more general discussions of this point. * This is not an exhaustive list of possible causes of market failure. In particular, it excludes monopoly power, or imperfect competition. While this may be one of the dominant causes of market failure generally, it is rarely used to justify government intervention in technology development. A notable exception is the communications sacellite industry, which is discussed in detail in section II. 1 . Financial Market Failure One of the most common arguments for government intervention in commercialization activity is based on the inability of the private capital market to provide necessary financing. This argument typically relies on the presence of three factors: (i) High uncertainty or risk (ii) Large fixed costs (iii) Long lead times for project
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