Create global knowledge investment zones (GKIZs) to attract foreign direct investment.

The federal government should identify a limited number of global knowledge investment zones as a key mechanism for attracting high-value-added foreign direct investment. Firms located in these zones would be eligible to receive a number of benefits, including: 1) The ability to write off (on federal taxes) all capital expenditures in the first year; 2) A collaborative R&D tax credit of 25 percent on all expenditures on research made at the associated universities in the GKIZ. For companies that are not yet profitable, tax benefits could be applied against payroll taxes; 3) Streamlined access to university technology, with university zone participants agreeing to implement leading-edge intellectual property and technology transfer practices, including “standardized” licensing agreements and policies to encourage faculty entrepreneurship, industry engagement, and technology commercialization; 4) Access to better-funded NSF I/UCRCs; and 5) Visa preferences by tapping into the unused portion of existing EB-5 visas.

Congress must take steps to retain and strengthen the domestic production deduction

The Section 199 deduction for domestic production increases the incentive to invest domestically. Eliminating this deduction would raise the effective tax rate on manufacturers and other exporting sectors, thereby at the margin leading to reduced exports, greater imports, fewer jobs in these sectors, and lower overall growth. Rather than eliminate it, Congress should expand it as President Obama has proposed for advanced manufacturing firms.

Congress should reduce uncertainty by making the R&D tax credit permanent.

R&D tax incentives in virtually all nations except the United States are permanent features of the tax code. Since its enactment in 1981, the R&D tax credit has been extended eleven times and expired three times. The uncertainty over the credit’s existence adds risk to the already risky research investments made by companies and reduces its effectiveness. One OECD study found that the less stable and more uncertain the credit is, the less likely it is to have a positive effect on stimulating R&D. One reason Congress has not made the credit permanent is because the expenditures must be scored for five years, raising the budgeted cost. While extending the credit each year does not lower its actual cost significantly, it does allow the costs to be passed on to next year’s budget.

Congress should direct NSF to establish stronger university entrepreneurship metrics and use them to provide stronger incentives for universities to commercialize research.

Congress should direct the National Science Foundation, working in partnership with National Institute of Standards and Technology, to develop a metric by which universities report entrepreneurship and commercialization information annually. The reports should include data on faculty new business starts, spin-offs of new companies from universities, license agreements and patenting, and industrial funding of research. Congress should further direct all major federal research funding agencies to factor these performance metrics into their decisions to award research funds to a university or university researcher. Applicants from universities that successfully promote entrepreneurial spin-offs/start-ups or that receive more in industry research funding would be more likely to have their principal investigator grants funded.

Congress should create an “Innovation Voucher” program operated by NIST.

Almost a dozen countries—including Austria, Canada, Belgium, Denmark, Germany, the Netherlands, Ireland, and Sweden—use innovation vouchers (ranging in value from $5,000 to $30,000) to spur R&D, new product development, and innovation activity in traded-sector SME firms by enabling them to “buy” expertise from universities, national laboratories, or public research institutes for assistance with preparatory studies, analysis of technology transfer, analysis of the innovation potential of a new technology, etc. The vouchers both spur innovation in SMEs and stimulate knowledge transfer from universities and research institutions to SMEs. In the United States, innovation vouchers could be introduced at either the federal or state level, but Congress should facilitate their introduction by authorizing $20 million to NIST to fund a pilot program operated by select states that agree to match the funding dollar for dollar. As a potential source of funds to keep this option revenue-neutral, one option would be to take 0.5 percent of the current allocation to national laboratories to fund the vouchers.

Congress should authorize the creation of a National Network for Manufacturing Innovation (NNMI) and allocate at least $500 million to support the initial deployment of at least 15 and as many as 25 Institutes of Manufacturing Innovation.

Unlike leading manufacturing nations such as Germany or even the United Kingdom, the United States lacks an integrated, well-funded national network of large-scale, industry-led manufacturing innovation centers that can accelerate technology deployment, operate demonstration facilities and test beds, support education and training, and perform applied research on new manufacturing processes. Accordingly, the United States should develop a National Network for Manufacturing Innovation (NNMI) that would establish at least 15 Institutes of Manufacturing Innovation (IMIs) that would bring together industry, universities, community colleges, federal agencies, and states to accelerate innovation by investing in industrially relevant manufacturing technologies with broad applications. The network would help bridge the gap between basic research and product development, provide shared assets to help companies (including SMEs) access cutting-edge capabilities and equipment, and create a compelling environment in which to educate and train students and workers in advanced manufacturing skills. Manufacturers would lead the development of IMI proposals, defining the scope and focus of the Institutes, and provide at least 50 percent of the resources for each IMI, with that contribution growing over time. But Congress should act initially to authorize the creation of the National Network for Manufacturing Innovation and allocate at least $500 million—which would be matched 1:1 by industry and state/regional governments—to establish a $1 billion fund to support deployment at least 15 and as many as 25 manufacturing institutes.

Congress and NSF can work together to eliminate the requirement that new proposals for Engineering Research Centers (ERCs) include an international partner.

Current regulations perversely require that proposals for new ERCs include an international partner. This is in part a reflection of the NSF culture which views its mission as advocacy of science—because science is internationalized, NSF wants to fund international collaborations. While certainly policy should not prohibit ERCs from including international partners, NSF should eliminate the requirement that an international partner must be involved, since the ERCs’ main goal should be to strengthen U.S. engineering and manufacturing.

Congress should increase funding for key federal statistical agencies assessing traded sector competitiveness and create a national statistical agency.

It makes little sense to have separate economic statistical agencies; other nations combine theirs into national statistical agencies, and the United States should do the same. At the same time, years of budget constraints have caused U.S. statistical agencies to lack the resources needed to effectively measure key elements of the traded economy. There are numerous examples, including the following, which should be rectified through increased or restored funding: The International Labor Comparisons Program at the Bureau of Labor Statistics (BLS), which produces timely, high-quality international comparisons of labor force, productivity, hourly compensation, and prices for many industrialized countries, was terminated in the Administration’s FY 2013 budget; The Bureau of Economic Analysis (BEA) no longer measures manufacturing foreign direct investment specifically and can’t distinguish between “greenfield” new plant investment in the United States and foreign purchases of existing U.S. establishments; BLS reporting of state level data on manufacturing property, plant, and equipment data ended in 2007; BLS lacks and needs to build an import price index so it can fix the productivity measurement problem with regard to imported manufacturing inputs; NSF needs to produce industrial R&D data in a timelier manner, as the most recent data is from 2008. It would also be helpful if the NSF data reported on three distinct components: scientific research, engineering research, and development; BEA should improve its existing annual surveys and five-year benchmark surveys of companies with facilities overseas to identify the type of products manufactured abroad and the number of employees at these facilities.

Congress and the SBA should assist SMEs in traded sectors in obtaining access to credit, in part by creating a 95 percent loan guarantee program.

Particularly in the wake of the recession, small manufacturers are having a difficult time accessing credit from financial institutions, and several policies could help remedy this. First, to help small manufacturers that have work orders in hand get credit, Congress should enact a 95 percent loan guarantee program for small manufacturers under the SBA 7(a) guarantee program. Second, the Federal Reserve should consider relaxing some of the stringent guidelines it has placed on local banks with regard to the liquidity ratios SME manufacturers must meet to be eligible for commercial loans. This would allow local banks to better understand and service SMEs’ capital requirements, given their particular cash flow constraints.

Congress should direct the Small Business Administration to shift its focus toward traded sector firms.

The U.S. Small Business Administration should focus more on traded-sector firms through its financing programs, including its 7(a) loan guarantee program. However, the SBA does not appear to give any special priority to traded sector firms, treating all industries alike in its funding priorities, in large part because this is SBA’s charge from Congress. But there are significant differences for U.S. job creation and prosperity between a small manufacturer and a small retail firm, for example. The former plays a significantly more important role in driving economic growth and—through the multiplier effect—jobs. Moreover, the United States will anyway have all the retail firms it needs (e.g., that the market demands), since the sector is not traded. As such, Congress should require the SBA to develop a report for Congress within six months on two items: an analysis of all SBA financing by sector (e.g., how much financing went to manufacturing, retail trade, personal services, information, etc.) and a plan for how SBA can significantly increase the share of SBA financing going to firms in traded sectors. Congress should then require that a significant share of SBA lending—both guarantee and direct lending—go to fund scale-up activities for SMEs in traded sectors.