TESTIMONY OF ALBERT SHAPERO, PROFESSOR OF MANAGEMENT, UNIVERSITY OF TEXAS, AUSTIN, TEX.

Mr. SHAPERO. I have a prepared statement and bad voice, so I will summarize my statement.

Senator HARRIS. Without objection, your statement will be placed in the record and you may proceed.

Mr. SHAPERO. Before I proceed with my statement, which is on the effect of local R. & D. industry on an urban complex, I would like to place it in a frame of reference.

I think there are three large questions which get intermixed in this question of distribution of R. & D. and its effects on regional development. They are the following:

1. How do we use the products of research and development to assist the economic development of a region?

In this regard, I would like to mention that Stanford Research Institute in Palo Alto, Calif., at one time developed the ERMA computer for the Bank of America. For the price of the postage, the reports which were produced were mailed to General Electric which finally put up a plant in Phoenix to produce computers.

2. What is the economic geography or the efficiency of a total R. & D. system in the United States vis-a-vis national problems such as defense and space? This is a question of how do we get the most out of what we have today in meeting our national objectives.

3. How can we develop a local capability for research and development for whatever purposes society or the local region aspires to? It is on this last question that I would like to concentrate the bulk of my remarks:

First, however, I want to talk about the style of research upon which these comments are based. Before coming to the University of Texas 5 months ago, I worked at Stanford Research Institute, in which I directed a division called technology management programs. In the past 5 years that division concentrated on research and development. We have done a great number of studies with mixed discipline teams, which contained everything from an Episcopal priest-physicist to an anthropologist and chemist. We studied many questions concerning how R. & D. operates. Our style of research, was one of going out into the field and smelling, tasting, feeling, and kicking the data about R. & D. in vivo.

I think one of the largest problems in evaluating the effect of R. & D. (and it does not matter whether it is 1 mile away or a thousand miles away) is that the social sciences tend to be done with published aggregated statistics, with questionnaires, and without people going out to see, smell, feel, and taste the situation. At Stanford Research Institute we were in a position to spend our time in the field as the problem required.

In the period of the past 5 years, we lived in and studied seven cities-Denver, Tucson, Orlando, Los Angeles, Boston, Minneapolis, and St. Paul. We collected data in great detail to the extent of making copies of application blanks of (after removing the namesI do think privacy is important) 40,000 scientists and engineers. These were not questionnaires. These were reference-checked application blanks. We looked at salary records. We looked at the educa

tional background of the men to see whether there was any systematic relationship to where they stayed or where they went. We looked at the migration patterns.

In the course of these studies, we developed the material I have presented here. It is not based on aggregated statistics, and I share your prejudice about averages, because they often speak about the man who shows quite a good average temperature, but on close examination it is seen that he has his head in the oven and his feet on a block of ice. In my prepared statement, I examined some of the reasons that are advanced by communities for desiring, wanting to have a local research and development or technological complex. I hope I do not have to define this further, merely to say a multiplicity of institutions and services that make up an industrial community within a community, in this case, one of high technology. I will not go through the usual reasons that are advanced about clean industry or attracting a work force with a high density of degrees and dollars per square head or having industries of the future. I think what is more important than most of these, and it has come out in some of the discussion here, is the semiconscious, but very potent desire to keep our young people with us. Towns are losing their youth. Increasingly we are bringing the best of what we have to offer in the way of education to our children. Education plays a high role in American life. Thus, are professionalizing our youth and the faster we professionalize them, even by building good local universities, the faster we lose them to where the action is.

Now, it is not only a matter of professional environment, but as a president of the University of Minnesota told us, "When you give a man a graduate education, you have changed him into a metropolitan animal." He is not a hunter and fisherman any more, and he may be attracted to it once in 3 years, but he goes to the big city or to the amenities he believes he will find in a big city.

In the course of my prepared testimony, I made up a composite of the actions taken by local communities to develop a local defense R. & D. community. I would like to relist them here. They include forming a local industrial development group.

To accomplish the development of R. & D. complex, most communities will first develop a local industrial development group. This group concentrates on advertising and on creating a "lure package," including changing the community's taxes and other things that they think will work, to attract industry.

In this lure package, they usually mention such things as tax concessions. They will provide facilities in various forms, including research parks nestled up against the university. They will sometimes do this in terms of free rent or cheap or long-term payment. They will build to suit.

They speak of clean water and plentiful electricity; they speak of hard-working, low-paid, unorganized labor. And, by the way, it is amazing how many communities hold this up as if they were proud to be the only ones with low-paid, hard-working, unorganized labor.

If they have a local university or college, they set about developing its physical sciences or engineering departments and bringing in many relevant and irrelevant forms of research. They will often encourage the local university to become the landlord of a research park.

If they do not have a local university or college or branch of the State universities, they will set about obtaining one, partially in the hope of getting industrial development of the type we are talking about here. They expect that the university will provide consultants and laboratories that will be useful to and therefor attractive to industry, and the opportunity for advanced education for the workers in the industry.

A little further afield, they think that the university will invent new things that by themselves contain spirits which, like rocks in ancient days, will just generate industries in the community. Or they think they will spin off companies, usually quoting, the example of MIT and route 128.

Similarly, they will often, but not as often, talk about forming a nonprofit research institute like Stanford Research. Most such institutes have been regularly organized for regional development.

And, finally, they will work very hard at bringing all kinds of pressure to bear to get Federal facilities and contracts in terms of medical, atomic, defense, space, other forms of research and development—all in the belief that any one or some combination of these will result necessarily in a local research and development complex.

Well, we spent 5 years studying these various factors among others. I would like to-I was going to say briefly, but it sounds longer than I had hoped-go briefly through some of these.

Advertising and local industrial development groups in 1957, my latest figures, there were about 14,000 local industrial development organizations in the United States who were trying to attract the divisions of large corporations or large companies to their communities. All of them advertised. It is estimated that in 1957 they spent over $200 million in advertising. There are some loose statements as to the number of establishments that form or-that move per year. I think the number is something like 500, of which it is estimated that 200 or less are open to any discussion as to where they go.

On the surface, it is a patently inefficient system to be one voice among so many. As an exengineer, I would call this a very low signalto-noise ratio. The chance of hearing one voice among these many is quite limited. The American ingenuity in boosterism is fabulous. There are State organizations that will send you a fresh fish, dripping in ice, on a Sunday morning, saying, "You could have caught this fish outside your door if you had lived in my State." There are people who will go to great lengths to try to attract companies on this basis.

I do not want to comment in detail, except to point out that one company announced it was going to move a major division and had its switchboard practically put out of action. Its mailroom was flooded with the materials from all the people with the booster spirit that you were mentioning before who were advertising and trying to get the plant.

Tax concessions-I think there have been a number of surveys on this and I agree with Dr. Chinitz. It is a marginal item that plays a minimal role in attracting companies. I also would like to point out that the company that moves for tax concession is not usually one of high technology. These companies are not worrying about a marginal difference in the product cost. It may be a good way to attract an obsolete industry and to put yourself right back chasing the leaders again.

Senator HARRIS. What if you gave the 20 percent?

Mr. SHAPERO. I cannot really answer that. I will point out, however, that Massachusetts, California, and New York, are not known for their low taxes. Yet they attract and retain companies. It is not the critical thing for highly technical companies.

Senator HARRIS. We are talking about breaking some inexorable laws of economics. It seems to be you may have to artificially change conditions if you are going to break this chain.

Mr. SHAPERO. I am all for it, but I think the major task as a researcher in this area who does not pretend to be a policymaker but sticks to his last is to clear the underbrush so you can see the actual structure that exists and can put your money where it will have some effect. I would not place my chips on something that has only marginal value. Let me put it that way.

Senator HARRIS. What I was asking. Might your judgment that it is marginal be altered if it were to involve a rather large Federal income tax incentive—that is, suppose you were going as high as, and I do not know that anybody proposes this suppose instead of a 7-percent investment credit for a job-creating plant and machinery investment, you would get a 20-percent investment credit if you located in a certain designated area?

Mr. SHAPERO. Let me say my prejudices outrun my data on this subject.

Senator HARRIS. But there is a point at which it becomes more than marginal, it seems to me.

Mr. SHAPERO. I imagine you could do it the other way. If you put such an onerous burden for working in the other areas

Senator HARRIS. I think you are talking primarily about local and State taxes. Suppose you take Arkansas, for example, which has a plan most States have now adopted, where you allow an industry to liquidate tax exempt bonds. I think that type of situation may alter your view somewhat. That sort of thing is not a marginal item if it is large enough

Mr. SHAPERO. If the conditions were different.

Senator HARRIS. Yes; and if it did not apply equally to every area in the country.

Mr. SHAPERO. The reasons I say my prejudice outrun my data is because, it is true, and second, there are more powerful incentives. Senator HARRIS. Right.

Mr. SHAPERO. Things like taxes and facilities are a small item in the profit and loss statements of a highly technical company.

Senator HARRIS. Let us go back to advertising. Primarily, what you are saying about these items is that they are marginal, but if everybody else is advertising, is it not necessary at least to do it, even if it is marginal in effect?

Mr. SHAPERO. Now that I have a new found home in Texas, if I may get folksy

Senator HARRIS. You will be right at home with Senator Hansen and me.

Mr. SHAPERO. I would like to suggest what I like to call the Shapero 90-10 Judo Plan. I would spend some money doing what everybody else does, but I would sure as heck spend some of my money on other novel approaches.

Taxes, are marginal in terms of the highly technical company. If you look at the profit-and-loss statement of a highly technical company, it is obvious that the major production factor, is the professional technical workforce. Everything else is relatively trivial for most of these industries. When you look at that, then you also get down to this utilities and labor question. Low-paid, hard-working, unskilled workers will not attract these industries. They are competing for the workers that in the United States today-are the highly paid, highly trained, high in demand technical workers. You only have to read the ads and see the pirating, see the conditions being offered a young engineer who has not graduated yet to realize that that low paid, hard working labor is not an effective attraction for the kinds of companies we are talking about.

The local university or college-now that I am in one of them-I feel in a better position to say what I am going to say more critically. When pressed for examples of universities that have resulted in spinoff-you try this in any group-you will hear MIT, Stanford, Cal Tech. Then they run out very rapidly. If they are a little more knowledgeable, they may add the University of Michigan at Ann Arbor. Again, without referring to my examples, let us look at the obvious numbers:

There are 1,500-plus 4-year colleges and universities in the United States. If you narrow it down to the ones who have graduate facilities, and I am not familiar with the figure, I think we have 350 universities that have graduate schools in science and engineering. We are still dealing with a very small number.

I find it very irritating to find scientists, who would never accept this kind of data in the field of physics, advocating unilaterally, just build a big physics department in my university and I will give you industry, based on less than one-tenth of 1 percent of the data. That is ridiculous.

We have to look at another variable. It is not just a university and it is not just a university that is very powerful in its physical sciences and engineering. The great majority of the universities traditionally are against having a professor undertake entrepreneurial activity and will fight it. The idea that you will build a university with a great powerful department and expect to get spinoff in terms of companies formed by these men goes contrary to any data that one can gather on this subject.

The colleges and universities that do have spinoff, incidentally, are coincidentally the universities with policies encouraging entrepreneurial activities. In fact, in Michigan, they tell me, the university was 10 years for it before they could get the professors to move.

I can think of two examples, an interesting parallel, of two schools in the Southwest, very good schools, in which in each case a professor of psychology formed a programed learning company and in each case the university fired the professor for misusing his role as a professor in forming a company.

Both companies moved to my former home area of Palo Alto, Calif., which will probably become a center for programed learning.

We looked at a number of universities. If a powerful university would have a spinoff, why not the University of Illinois, why not Purdue with its research park? They have tried and tried. This will not do it by itself.