ISB Int elligence Science Board Intelligence Science Board Task Force Report on The Intelligence Community and Science and Technology The Challenge of the New S T Landscape November 2006 Office of the Director of National Intelligence Washington D C 20511 F01RR o iFijF ICCIAIAIL 'UBiSSJKg Q NlLLY_il' This report is a product of the Intelligence Science Board ISB The ISB advises the Director of National Intelligence and senior Intelligence Community leaders on emerging scientific and technical issues of special importance to the Intelligence Community Statements opinions conclusions and recommendations in this report do not necessarily represent the official position of the Office of Director of National Intelligence or the Intelligence Community This report is For Official Use Orily- ii FOR LY FOR OFFICIAL USE ONtN TASK FORCE MEMBERSHIP TASK FORCE MEMBERS John MacGaffin Intelligence Science Board Harold Rosenbaum Chair Intelligence Science Board STAFF The MITRE Corporation The MITRE Corporation Barbara Grewe Margaret MacDonald iii FO LY FOR OFFI THIS PAGE INTENTIONALLY LEFT BLANK FOR OF ONLY TABLE OF CONTENTS TASK FORCE MEMBERSHIP o o oo o oo o o o III TABLE OF CONTENTS V TASKING VII EXECUTIVE SUMMARY IX Background ix Discussion and Recommendations xi 1 INTRODUCTION o 1 2 THE ALTERED LANDSCAPE 3 2 1 U S Funding for R D 3 2 2 Global Trends 6 2 3 Education of Scientists and Engineers 11 2 3 1 Worldwide Trends 11 2 3 2 Foreign-Born Scientists and Engineers 12 2 4 Worldwide Access to Information 15 2 4 1 Broadband Access 15 2 4 2 Cellular Telephones 16 2 4 3 Internet Standards 17 3 IMPLICATIONS CHALLENGES AND OPPORTUNITIES 21 3 1 Research and Development 21 3 1 1 Disruptive Innovations 23 3 1 2 Observations 28 3 2 Information Access 29 4 CONCLUSIONS AND RECOMMENDATIONS 31 4 1 Conclusions 31 4 2 Recommendations 33 4 2 1 iARPA 33 4 2 2 Remove Artificial Boundaries 35 4 2 3 Tap New Resources Resulting from Globalization 36 4 2 4 Utilize the Talents of Those Awaiting Results of the Lengthy Clearance Process 37 4 2 5 Accept and Encourage Risk Taking 38 APPENDIX A RESEARCH AND DEVELOPMENT o o o 39 A 1 Basic Research 40 A 2 Development R D 44 A 3 The Shifting International Landscape 45 v APPENDIX B THE EDUCATION OF SCIENTISTS AND ENGINEERS Is MOVING EASTWARD 55 APPENDIX C DISRUPTIVE INNOVATIONS 66 C 1 Nanotechnology 68 C 2 Biotechnology 79 APPENDIX D WORLDWIDE ACCESS TO INFORMATION Is EXPANDING RAPIDLY 81 D 1 Broadband Usage 81 D 2 Cellular Telephones 86 D 3 Internet Standards 91 APPENDIX E ACRONYMS AND ABBREVIATIONS 93 vi FOR OFFICIAL USE ONLJPY FOR OFFICIAL t SE OJSI y_ TASKING June 9 2006 MEMORANDUM TO Dr Anthony Oettinger Chairman Intelligence Science Board ISB FROM Dr Eric Haseltine Associate Director of National Intelligence for Science and Technology I request the ISB undertake an analysis of trends in science and technology diffusion that threaten US superiority in S T areas critical to the IC As globalization spurs competition from foreign countries and erodes US predominance it offers opportunities for new collection paradigms and places new requirements on US technology investment strategies The IC's response to this growing challenge must be designed to match the pace of this growing global threat Particular attention should be paid to the pace of foreign efforts to compete across a broad spectrum of critical science and technology areas The ISB should recommend actions to be taken by the DNI that ensure the IC moves efficiently and rapidly to both provide the community with competitive S T tools for technical collection technology that supports human collection and the ability to assess the near and far term threat from the use of these capabilities against the us This is a rapidly evolving threat enhanced by the US participation at every level in the global marketplace Accordingly I request the ISB respond within four months with analysis of this growing threat and recommended actions for the DNI to chart a course of action that is consistent with the pace of the threat vii FOR OFFIC THIS PAGE INTENTIONALLY LEFT BLANK FOR OF LY EXECUTIVE SUMMARY Without the kind of intelligence which the CORONA program provided the U S budget for the defense of our own territory and for military assistance to our allies would doubtless have been increased by billions Worse We might have misguidedly been pressured into a World War 111 1 BACKGROUND During the decades of the cold war U S science and technology S T indisputably led the world and served as an essential enabler for the intelligence and military forces required to support our strategy of deterrence and containment The world has changed significantly since then deterrence and containment are tangential to the problems posed by terrorism and radical Islam but intelligence and the other instruments of national power have not yet found the right alternative The effort reported here focuses on one piece of this complex issue the impact on the Intelligence Community of the new global S T landscape Many studies have addressed the current and projected state of U S S T compared to the rest of the world An exhaustive report by the National Academy of Sciences The Gathering Storm 2 analyzes all aspects of U S research and development R D from education to innovation and implementation The Gathering Storm concludes that the United States still possesses the world's strongest science and engineering enterprise but that other nations both developed and developing are challenging our preeminence The rate at which the rest of the world is expanding its efforts to close the gap significantly exceeds our efforts to maintain that gap That the United States probably continues to dominate in some or most traditional areas of S T tends to mask the rate of closure and to obscure the near certainty that in some very important areas we will soon lose our historic lead This also calls into 1 Kenneth E Greer CORONA recently declassified version of 1973 report in CIA History Staff CORONA America's First Satellite Program Washington DC Center for the Study of Intelligence Central Intelligence Agency 1995 38 2 National Academy of Sciences Committee on Prospering in the Global Economy of the 21st Century An Agenda for American Science and Technology Rising Above the Gathering Stonn Energizing and Employing America for a Brighter Economic Future Washington DC National Academy of Sciences 2006 hereafter cited as Gathering Stonn ix FO NLY question whether ahead and behind even remain useful ways of viewing this subject and whether the United States can identify and adopt new ways to accommodate that reality While the overall effect of a declining S T position on the United States remains the subject of debate there can be no debate concerning its enormous impact on the Intelligence Community Not only does it affect the Community's mission to develop new science-based tools that can meet dramatically changed collection needs but it also makes it more likely that our adversaries can employ the very same- or perhaps even more advanced-S T available to the United States Today's collection and analysis needs no longer driven by a policy of deterrence and containment and the asymmetric capabilities of adversaries who are not necessarily nation-states require an entirely new approach to increasing the contribution of S T to the intelligence enterprise Neither the Intelligence Community nor the S T establishment has put forth viable strategies for accomplishing this change One of the principal enablers of the rapid worldwide diffusion of S T is the ubiquitous Internet combined with broadband access It has been stated that the Internet is to the 21 51 century what the airplane was to the 20th century except that it moves information rather than people and things and is available to anyone anywhere at little or no cost Information processed by people can lead to knowledge which in turn can lead to applications enabling for example the incredible capabilities that our adversaries have exploited and used to further the goals of radical Islam One of the greatest challenges facing the IC is to target collect against and assess such disruptive applications before they appear The changing nature of funding for U S R D from government to industry poses a further complication for the Intelligence Community as does the need for multinational collaboration to support research on such potentially disruptive capabilities as nanotechnology life sciences including biotechnology high-speed computing and telecommunications quantum computing and others The government now has far less control than before over the problems addressed the selection of personnel to perform the work and the locations where the work is carried out and less knowledge than ever before of what work is actually being done Moreover anyone anywhere can log on to see the results of the latest worldwide S T investments x FOR OFFICIAL USE QNLy This concern extends beyond high technology such as satellites and stealth It encompasses a fundamentally changed mission and the associated entirely new collection and analysis needs The terrorist threat resembles a metastasized cancer that has spread through the world body Just as early detection and new medical advances for locating differentiating and destroying cancer cells without collateral damage to critical organs are the tools for defeating cancer precisely targeted intelligence represents the best way to combat spreading terrorism Collection and aggregation of granular data provide the key to both tactical and strategic intelligence products and activities that can enable the intelligence profession to accomplish its new missions The necessary granularity may reside more in the world of open source information than it does in the classified realm Thus increasing the synergy between the Intelligence Community and the worldwide community of scientists and technologists has become imperative The forces and trends involved extend well beyond the scope of the Intelligence Science Board ISB However the ISB's responsibilities include generating transformational ideas focused on the Intelligence Community This report addresses ideas previously suggested and recommends some newer approaches DISCUSSION AND RECOMMENDATIONS In a recent series of addresses the Director of National Intelligence DNI announced plans to form an R D program for the Intelligence Community that draws upon the lessons learned from the Defense Advanced Research Projects Agency DARPA We enthusiastically support the iARPA concept but urge the DNI to establish the program in a manner that maximizes the probability of success The right to fail professional technical management and adequate resources of both staff and money gave DARPA the chance to succeed These same elementsespecially the right to fail availability of resources and the time to try and try again- are the key ingredients of successful human intelligence HUMIN1 Unless they are also key elements of an S T effort that will enable the new HUMINT we now so desperately require iARPA cannot succeed More specifically if iARPA simply combines existing programs all of which lack adequate staffing and finances it will maximize the probability of failure not success That legacy would have agonizing consequences xi FO Y As recommended by The Gathering Storm in connection with an ARPA program for the Department of Energy the Intelligence Community's iARPA program will need a rotational staff We recommend that half of this staff come from the private scientific community and half from the Intelligence Community Staff assignments should last no less than two years or more than four years This constant infusion of new talent and new ideas would yield obvious benefits to the Intelligence Community Like DARPA iARPA should also be a multilevel security program Finally and just as critical we urge the DNI to exercise his reallocation authorities and ensure that iARPA is funded at a minimum of double the level of the existing organizations that are being transferred into this new program This would make discretionary funding available for new ideas and for longer term programs 3 and avert poaching on programs already underway Without this level of funding without the expectation that failures will outnumber successes and without an integrated mix of talented personnel from within and outside the Intelligence Community who are experienced across collection and analysis the new enterprise will simply replicate what already exists do what we have always done get what we have always gotten If the Intelligence Community is to compete and perform its expanded mission it must take risks assess those risks and continually measure their impact We cannot continue to keep the best and brightest in limbo until they receive their highest level clearance and then put them into the electronic isolation-like atmosphere of the current Intelligence Community organizations It is remarkable how many people in the community recognize this and how many people are unable to do anything about it We strongly urge the DNI to mandate changes in current business practices that inhibit the hiring and effective use of the best and brightest analysts collectors and linguists especially at the entry level Heroic efforts have begun but transformation- not evolution-is needed When accepted for employment candidates should be put to work in a multilevel security environment that permits them to contribute immediately and- most important-allows them to use the information technology tools available to the rest of the world The current system uses intermediaries who collect synthesize and feed their own conclusions to those who write assessments That 3 Recall that in the CORONA program launch after launch-eleven in all by May 1 1960 eight of which carried cameras--resulted in failure The only variation was in the cause xii FO LY approach lowers the quality of assessments and fails to empower analysts with fundamental understanding of the subjects for which they are responsible The new global environment can confer certain advantages there are probably more Americans now employed in multinational corporations in foreign and domestic companies than ever before The Intelligence Community needs a better way to collect from them Because the range is so great and the talent within the Intelligence Community available to exploit these opportunities so overextended we must first triage those areas where new innovative and direct interaction by analysts would likely have greatest impact against the highest priority target areas Thereafter traditional collectors and analysts together must find new ways to ensure the most effective and direct interaction with this important source of S T insight outside the United States Similarly Intelligence Community analysts cannot directly access existing collaboration networks that include foreign experts- government academic and retired We must change the rules and permit our analysts to participate either openly or anonymously if they are truly to understand other cultures and their uses of S T Much of what we recommend involves change but change implies risk More than ever in the past pervasive risk aversion severely hobbles innovation in the Intelligence Community The dramatic change in the nature of the threat and the potential adversaries we face compounds this problem to critical levels Unless the Intelligence Community leadership can break through and create a realistic risk management approach to such issues as increasing direct analyst involvement in the most important areas of private sector S T expertise the Intelligence Community will have wasted its efforts Leadership is the answer and that leadership that permission to take measured risk must come from the DNI xiii FOR OFFICIA NLY THIS PAGE INTENTIONALLY LEFT BLANK xiv FOR OFFIC ONLY 1 INTRODUCTION In recent years numerous reports have sounded the alarm regarding U S competitiveness in science and technology S l According to the United States Commission on National Security 2tst Century Americans are living off the economic and security benefits of the last three generations' investment in science and education but we are now consuming capital Our systems of basic scientific research and education are in serious crisis while other countries are redoubling their efforts In the next quarter century we will likely see ourselves surpassed and in relative decline unless we make a conscious national commitment to maintain our edge We also face unprecedented opportunity The world is entering an era of dramatic progress in bioscience and materials science as well as information technology and scientific instrumentation Brought together and accelerated by nanoscience these rapidly developing research fields will transform our understanding of the world and our capacity to manipulate it The United States can remain the world's technological leader if it makes the commitment to do so But the U S government has seriously underfunded basic scientific research in recent years The quality of the U S education system too has fallen behind those of scores of other nations This has occurred at a time when vastly more Americans will have to understand and work competently with science and math on a daily basis In this Commission's view the inadequacies of our systems of research and education pose a greater threat to U S national security over the next quarter century than any potential conventional war that we might imagine American national leadership must understand these deficiencies as threats to national security If we do not invest heavily and wisely in rebuilding these two core strengths America will be incapable of maintaining its global position long into the 21st century 4 This report by the Intelligence Science Board analyzes the challenges this altered S T landscape presents for the Intelligence Community IC It focuses on several key questions o How does this change affect the way the United States employs S T to meet its national security goals 4 The United States Commission on National Security for the 21st Century Road Map for National Security Imperative for Change Washington DC February 15 2001 ix 1 FO ONLY FOR ONLY o How can the United States understand how others may employ S T to our disadvantage o What does this altered landscape offer that the United States can exploit o How can the IC transform to meet this challenge In the next section we review broad-based indicators of the changing competitive landscape in general Section 3 discusses some implications of this shift with particular focus on particularly critical technologies especially those being developed openly and collaboratively worldwide In Section 4 we draw some conclusions from this background and then offer recommendations for beginning the process of adjusting to this new world The Appendixes provide a more detailed description of worldwide S T today and the trends for the future 2 2 THE ALTERED LANDSCAPE 2 1 U S FUNDING FOR R D U S research and development R D spending overall grew to $319 7 billion in 2005 growing 2 5 percent from 2004 It is projected that the 2006 data will show continued growth to $328 9 billion largely due to investments by the business sector s But while spending has continued to increase the sources of funding and type of research conducted have shifted Private industry funding for R D overtook federal spending in 1979 Figure1 The federal share of R D funding fell to a low of 24 9 percent in 2000 and then rebounded to a projected 29 9 percent as the business sector entered a slowdown and federal spending expanded particularly in the areas of defense health and counterterrorism 6 However more recent budget figures indicate that funding for federal R D in the FY2006 budget after adjusting for inflation would decline for the first time since 1996 200 175 150 H _1 I I ' ' I I 125 100 ' I _ --_ __ 15 50 25 ----- 0 1953 1968 -- _______ ---- 1963 r _ 1968 1973 111711 1913 1111111 1 93 I 2003 F- gFFROC _ _ _ _ _ _ NOTE RaD _ 2004 npojl lon SOURCE -Sdlol 1F-- G1Sdonco_ _ _ _ GIRl 0_1_ its Figure 1 U S R D Spending by Funding Sector 1953-2004 5 2005 R D Funding Forecast R D Magazine January 2005 F3 2006 R D Funding Forecast R D Magazine January 2006 F3 6 National Science Board ience and Engineering Indicators 2006 Volume 1 Washington DC National Science Foundation February 23 2006 4-5 http www National Science Board gov statistics seind06 3 1bis development has significant implications for advancing R D In essence it has meant that control over the types of research conducted has moved to the private sector Because federal and industry funds tend to be used for different types of R D this shift between business and federal spending has meant a decline in the basic research and a concomitant increase in shorter-term more applied research Figure 2 Moreover the government now has far less control than before over the problems addressed the selection of personnel to perform the work and the locations where the work is carried out and less knowledge than ever before of what work is actually being done Anyone anywhere can log on to see the results of the latest worldwide S T investments U S Basic Research by Funding Source 1991- 2004 Expenditures in billions of constant 2005 dollars 60 50 ---------- - ----- --- --- ----------- ------------ oAll Other Sourceso ----------------------o Indus try 30 20 o Total Federal 10 0 R Scute MAS t ed on NSF NlllioMI Prtlletnt tJI RW 10 for 2ll04 -l begrll 11 1991 bec11M a l - In NSF mellOCls IDf lncll8lllel A O om MAY '06 e 2006 AAAS Figure 2 U S Basic Research by Funding Source 1991-2004 Most basic research7 is funded by the federal government and is performed at universities and colleges The majority of the support-59 percent- went to the life sciences while the shares devoted to engineering and the physical sciences declined The primary increases in recent years occurred in biomedical research conducted by the National 7 Basic research is work undertaken to gain knowledge and understanding of the fundamental aspects of nature Congressional Research Service CRS Science and Technology Policy Jssue s for the JO' 'lt Congre ss Washington DC February 2006 updated September I 2006 I 4 Institutes of Health NIH However in the FY2006 budget most of the growth was attributable to increases in defense weapons systems and the National Aeronautics and Space Administration' s human space exploration technology program s However basic research has declined as a proportion of federal funding Academic institutions have become increasingly reliant on federal funds for supporting their research programs This becomes significant in view of the characteristics of the faculty members who actually conduct the research many of whom are foreign born see Section 2 2 2 Purely developmental activities directed toward the creation of new goods services and processes are primarily funded by industry and constitute the majority of industry R D spending Figure 3 Thus as support for U S R D has shifted from federal funds to industry funds the amount of money spent on long-term basic research has remained relatively flat while spending on short-term developmental projects has increased substantially In 2003 over one-third of all industry-funded R D was concentrated in the computer and electronic products industry and computer-related service companies 9 Trends In U S Industry R D 1991-2004 Ellpendhurn In blHlons of constant 2005 dollars 160 - - - - - - - - -- -- - -- -- --- -- --- Development up 89 5% 140 120 100 80 _-__________ ____ _ _____________________________________ ____ 60 _______ _ ______________________ 40 ------------------------------------------------------' --------- - - - ----------- - ------- 20 0-1--1--1- - --- --- -- -- -- -- -- -- - i i I I ---- - --ol llUJ- Buie Research up4 1% I i i i I Dola larl004 _ _ 0 -boglrm 111111 - o1 - 1n NSl' l a r - - NO _ -ol ND Eia lum ND ftnllCI bl v 2009 ANS 'OSo Figure 3 Trends in U S Industry R D 1991-2004 8 9 Ibid 2 National Science Board supra 4-5 5 2 2 GLOBAL TRENDS Meanwhile foreign investment in R D has been growing at a greater pace than U S R D The National Academy of Sciences Committee on Prospering in the Global Economy of the 21st Century stated in their report that having reviewed the trends in the United States and abroad the committee is deeply concerned that the scientific and technical building blocks of our economic leadership are eroding at a time when many other nations are gathering strength 10 Others have suggested that the problem is not so much that the United States is in decline but rather that others are advancing quickly from behind putting all their economic resources into moving their countries forward The problem is that even if the United States were doing everything right the world still poses an unprecedented competitive challenge Unfortunately we are not doing everything right and this compounds the challenges that we face n Statistics for Organisation for Economic Cooperation and Development OECD and nonmember economies show that the 1995-2003 average annual growth rate of 17 1 percent for eight non-OECD members contrasted sharply with the 5 6 percent annual growth for OECD members Figure 4 Industry is also increasingly looking beyond national borders as it decides where to locate R D activities Foreign-owned companies and foreign-born inventors now account for nearly half of U S patents 12 The global nature of S T markets is also reflected in the rising number of corporate international alliances devoted to joint R D or technology development The number of new international alliances rose from under 100 in 1980 to 342 early in the twenty-first century These multinational corporations and organizations compete against or even overshadow national entities and interests which can result in the blurring of distinctions between government and commercial goals 13 Moreover existing mechanisms to identify foreign membership control or w Gathering Storm 2 2005 Report to Congress of the United States-China Economic and Security Review Commission hereafter cited as China Commission Washington DC November 2005 citing testimony of William Archey 94 http www uscc gov annual report 2005 05annual report contents htm 12 National Summit on Competitiveness Statement Investing in U S Innovation December 6 2005 1 http www mep nist gov competitiveness-innovation pdf 13 Counterintelligence in a Time of Rapid Change The Impact of Technology and Globalization June 26 2006 11 6 FOR OFFICIAL USE ON bJPY FOR OFF'ICIAL USK ONLY influence over U S firms whose work is vital to U S defense and intelligence systems have proven inadequate to keep up with the rapid changes in ownership control and influence 14 FlgUl8Q 6 MD expenditures of selected region and countrtea 1DD0-2003 100 ----------------------50 1-------- o __ _ __ ___ __ __ __ _ __ __ __ ___ 10llO 10Q3 1Qlll5 1007 18 2001 2008 EU o 8 RlpHll Unkln NOlE8 Nldllfll cela ltnld by for Economic _ 0 tlopntnt OE Dj wl h Pllld ina _ pllillM Cliltl dlw flan U 8 dolli- - - - U 1115 111 EtJ 15plue10- Mmb9r' OUFICE OECD llltd vwloul 'MR Figure 4 R D Expenditures of Selected Regions and Countries 199 2003 Europe remains the single largest location of overseas R D expenditures but R D expenditures in Asia by U S -based multinationals more than doubled to about $3 5 billion in the region This increase was fueled primarily by steep investment growth in China and the Asia-8 economies 15 Average annual increases in R D investment from 1991-2003 ranged from 4 percent to 5 percent for the United States EU-25 and Japan These contrasted sharply with the 17 percent average annual growth for China and this rate is accelerating for the past five years China's R D expenditures have registered 24 percent average annual increases Even if more fully comparable Chinese figures reduced the growth statistics 14 U S Government Accountability Office GAO Industrial Security-DOD Cannot Ensure Its Oversight of Contractors under Foreign Influence Is Sufficient GAO Report GA0-05-681 Washington DC July 2005 http www gao gov new items d0568 l pdf 15 NSF Science and Engineering Indicators 1006 0-5 7 FORO somewhat such a rapid advance in comparison to the leading R Dperforming countries and regions would still be unprecedented in recent history The increase in spending is complemented by the growth in China's industrial research workforce which expanded from 16 percent of the size of its U S counterpart in 1991to42 percent in little more than a decade 16 The United States-China Economic Security and Review Commission China Commission found that Science and technology S T development is the centerpiece of China's comprehensive strategy to build national power As a result the Chinese government has a comprehensive coordinated strategy for S T development which it began to implement in the mid 1980s with the 863 program This strategy translates into government policies to encourage growth and investment in key industries among which are software and integrated circuit industries Such policies include foreign investment incentives tax incentives government subsidies technology standards industrial regulations and incentives for talented Chinese students studying and working overseas to return to China Many of these policies make it difficult if not impossible to achieve a level playing field in this area of U S China trade and jeopardize long-term U S leadership in this vital sphere 17 The Commission noted further that Attracting U S and other investment into China has been an important component of this strategy particularly where transfers of technology and know-how have accompanied this investment 18 New industrial technology alliances worldwide reached an all-time peak in 2003 In addition many high-tech companies have begun to locate major research installations outside the United States Most notable is the dramatic increase in foreign investment in China by mid2004 the Chinese government had registered over 600 such facilities many belonging to large U S -based multinationals 19 In 2003 China cited a Fortune survey showing that over 92 percent of multinational corporations will consider setting up regional headquarters in China in the future 20 16 National Science Board supra 0-6 China Commission supra 86 18 Ibid 85 19 Richard Freeman Does Globalization of the Scientific Engineering Workforce Threaten U S Economic Leadership Working Paper 11457 National Bureau of Economic Research June 2005 9 20 http au china-embassy org engtjmhz t46221 httn 17 8 FOR OFFICIAL 6SE ONL By contrast the share of R D sites based in the United States and in Western Europe has fallen over the last 10 years Data about plans over the next three years for current R D networks of surveyed companies reveal that almost all of the planned growth in foreign R D will be in China and India 21 which are about to overtake Western Europe as the most important locations where U S companies conduct foreign R D Mere growth in sites does not tell the whole story however In China a low-cost skill base is coupled with companies' need for market and customer access which suggests that companies are focusing less on large innovation gains in China than in India or Eastern Europe Overall foreign sites were found to be more likely to focus on specific areas of expertise within the development process and on customizing products for local markets Indeed the primary reason that companies cited for opening or increasing the size of new sites in China was to be closer to their customers 22 11 The China Commission found that the sophistication of the technology developed and produced by China is increasing at an unexpectedly rapid pace and cautioned that China's approach to this development includes aggressive use of industrial espionage 23 It reports that China is using its large network of overseas researchers and students to acquire confidential scientific and technological information from foreign companies see Section 2 2 and cites David Szady the former chief of FBI counterintelligence operations as saying that Chinese espionage efforts have helped the country attain technological developments that would normally take ten years but are only taking China two or three Szady alleges that China's industrial espionage focuses on systems materials and designs and on going after both the private sector the industrial complexes as well as the colleges and universities in collecting scientific developments that they need 24 At the same time the globalization and growth of multinational corporations and organizations is blurring the distinction between government and 11 11 21 China Commission supra Ibid 6 9 23 Ibid 87 The Commission noted that as a result U S companies are taking some precautions with respect to their China operations For example it said Intel has not built a fabrication plant in China because it feared that it would lead to a transfer of proprietary information on its chip designs and also on the design and management of its manufacturing process Id citing Fred Vogelstein How Intel Got Inside Fortune October 4 2004 127 24 Ibid 93 citing Damian McElroy China Aims Spy Network at Trade Secrets in Europe The Telegraph July 3 2005 22 9 FOR UF'FICtAL tJ E ONLY FOROFFICIA commerce making it difficult to distinguish between foreign-based corporate spying and state-sponsored espionage 25 The China Commission also noted that China is making significant progress in developing indigenous firms that have global brand recognition reputations for producing quality products and leadingedge R D programs China's growth strategy also involves developing different technology standards which may act as a significant market access barrier to products made outside China 26 Another commentator stated that Chinese leaders view science and technology as a kind of warfare China's progress on the technology front is seen as intimately connected to the global strategic balance 27 Assessing the actual level of technological development in China is difficult and subject to dispute U S government assessments of China have traditionally assumed that China's technological development lags far behind that of the United States While conceding that China has made high-level breakthroughs in nanotechnology computer chip and semiconductor design satellites and supercomputing the federal government does not currently produce an assessment of the implications of these advancements for China's technological development as a whole or their application specifically to China's military advancement 28 The China Commission pointed out that neither current National Intelligence Estimates on China nor the Department of Defense's DoD's annual report to Congress on China's military power contain an assessment of China's technological development 29 The National Science Foundation NSF measures such development through various indicators such as the number of patents granted the amount of funds U S parent companies invest in R D affiliates in China domestic gross expenditures for R D the number of science and engineering S E degrees issued and the percentage of high-technology exports NSF concludes that with the exception of the S E degrees indicator China's technological development is low relative to that of Malaysia Taiwan and South Korea However the rate of growth for these indicators in recent years is prompting the NSF to update its data on China By contrast a Korean 25 Counterintelligence in the Time of Rapid Change The Impact of Technology and Globalization June 26 2006 26 China Commission supra 90 27 Evan Feigenbaum China's Technowarriors Stanford CA University Press 2003 1 28 China Commission supra 96 29 Id 10 FOR OFFICIAL mm ' I JPY_ FOR OFFICIAL t7SE ONLY government assessment places China's technological development only 2 1 years behind Korea and 7 0 years behind the United States 30 Academic R D has seen robust growth in many countries as governments try to stimulate basic research capability and to connect universities with industry for the efficient exploitation of research results The United States and the EU-25 including10 new member countries have been spending similar amounts for academic R D $41 to $44 billion in 2003 Such spending remains less prominent in Asia where R D tends to focus more on applied research and especially on development China has experienced the most rapid growth in its spending for academic R D but the academic sector plays a relatively small role about 10 percent in China's R D system 2 3 GBPDUCA 710N OF 5CJEN71STS AND ENGINEERS 2 3 1 Worldwide Trends Like the industrial sector the education sector is becoming increasingly globalized Today foreign students earn 30 percent of the doctoral degrees awarded in the United States and 38 percent of those in the United Kingdom In the United States 20 percent of newly hired professors in science and engineering S E are foreign born while the vast majority of newly hired faculty at the top research universities in China received their graduate education abroad 31 The number of first university degrees32 awarded around the world is rising rapidly from about 6 4millionin1997 to 8 7 million in 2002 Among these the largest proportion of these degrees are in S E but the share of S E degrees in the United States just under one-third is lower than in other countries as is the share of U S degrees in natural sciences and engineering NS E -S E degrees not including the social sciences and psychology These statistics have held fairly steady over the years They also reflect world trends in 1997 an average of 44 percent of all 30 Ibid citing Michael Pillsbury research and RAND report Richard Levin Universities Branch Out From Their Student Bodies to Their Research Practices Universities Are Becoming More Global Newsweek August 21 2006 32 According to the U S Department of Education's Institute for Education Sciences A bachelor's degree in the United States the first university degree is typically of medium length three to five years duration in the international classification In Germany it is called the Diplom in Italy the Laurea and is generally a long degree five to six years duration in the international classification See http nces ed gov surveys intemational Intllndicators glossary asp 31 11 FOR OFFICIAL tJSE ONLY - FOR OFFICIAL USE QNI Y degrees awarded in other countries were in S E but that number fell to 38 percent in 2002 Similarly the share of NS E degrees in countries other than the United States declined from 30 percent to 27 percent The education of young people in NS E has become increasingly important for many governments as they try to build more knowledgeintensive economies and statistics vary widely for first university degrees in NS E The United States with just under 6 percent ranks 32nd out of the 90 countries for which data are available China and India have low ratios 1 6 and 1 0 respectively due to low overall rates of access to higher education in those countries but China is strongly trending upward as production of S E degrees in China doubled and engineering degrees tripled over the past two decades 3334 The number of S E doctorates internationally has also increased In recent years most S E doctorates 78 percent in 2002 were granted outside the United States Approximately one-third of the engineering doctorates were awarded in Asia where numbers are probably understated because of incomplete reporting In 2002 the United States produced only 15 percent of the world's engineering doctorates but even then students on temporary visas earned more than half of these degrees 2 3 2 Foreign-Born Scientists and Engineers The influx to the United States of scientists and engineers from other countries accelerated in the 1990s and the number of foreign-born individuals holding U S S E jobs increased sharply By 2000 this share had increased from 14 percent to 22 percent Figure 5 More than half of the engineers holding doctorates and 45 percent of doctorate holders in the physical sciences computer sciences and life sciences were foreign born one-third of them coming from India China and the Philippines Among doctorate holders those from China and India alone comprised one-third of the total 33 34 National Science Board supra 0-12 Ibid 12-13 12 FOR OFF'ICD L USE QNI Y Flgtae0-29 Share of foreign-born scientists and engineers In U S S E occupations by d8'J'ee level 19DO and 2000 Peroent 40 -------------------------------- D Grcwt added 1 19QO 0 Al ct gr 9 Bechelcr'o MMW'o NOTE Dela-Ude pom cormytwh- becai e ct c occupation coding 80URCE U 6 0 a 5-P - t l'UtJllc-UM Mlc foclMa Sample - cll'llUl puma h 11 sa no Mwl vi tndk atatw 200tS Figure 5 Share of Foreign-Born Scientists and Engineers in U S S E Occupations 1999-2000 Foreign students earned one-third of U S S E doctorates and 55 percent of engineering doctorates whereas the number of S E doctorates earned by U S white males dropped sharply The production of U S S E doctorates since 1990 rose from 23 800 to a record 28 800 in 1998 before dropping to 26 900 in 2003 The overall number was strongly driven by the number of foreign students Each year between 6 800 and 8 700 doctorates were awarded to students holding temporary visas in 2003 these students earned one-third of the total number of doctorates more than half of those in engineering 44 percent of those in mathematics and computer science and 35 percent of those in the physical sciences 35 Changes in U S visa policies after September 11 2001 affected the flow of foreign-born scientists and engineers into the United States The number of high-skill-related visas issued annually to students exchange visitors and others decreased sharply after September 11 Foreign 35 The number of U S Asian students is inflated by the conversion of large numbers of Chinese students with temporary visas to permanent status under the 1992 Chinese Student Protection Act 13 FOR OFFICIAL USE 6NLJPY- student visas are now recovering but remain down by one-fifth since 2001 while other high-skill visa categories are showing upward trends 36 Despite the recent downturns foreign students earned one-third of U S S E doctorates and 55 percent of engineering doctorates In 2003 students holding temporary visas earned one-third of the total number of doctorates more than half of the engineering doctorates 44 percent of the mathematics and computer science doctorates and 35 percent of the physical science doctorates 3 7 Moreover a growing number of graduate students doctorate holders and postdoctoral fellows chose to remain in the country for further study or work Through 2003 53 percent of the 1993 doctorate recipients were working in the United States in 1997 and 61 percent of the 1998 cohort had also remained in the country This influx of students and S E professionals from Asia to the United States may not continue especially since other countries are creating immigrant-friendly policies for those with advanced S E degrees Asian nations that have been the source of two-thirds of foreign doctoral candidates in the United States are now developing their own S T infrastructures New approaches to conducting academic research across international borders may represent an even more interesting development For example a Chinese professor at Yale runs a research center focused on genetics of human disease at his alma mater Shanghai's Fudan University in collaboration with faculty from both schools The Shanghai Center has 95 employees and graduate students working in a large laboratory facility Yale faculty postdoctoral fellows and graduate students visit often and attend videoconference seminars with scientists from both campuses The Yale-based laboratory is more productive due to the lower costs of conducting research in China and Chinese graduate students postdoctoral fellows and faculty receive on-the-job training from a world class scientist and his U S team 38 36 National Science Board supra 0-17 Ibid p O-l -16 38 Levin supra 37 14 FOR OFFICIAL USE H H y__ FOR OFFICIAL VSE QNI y_ 2 4 WORLDWIDE ACCESS TO INFORMATION 2 4 1 Broadband Access The rapid expansion of broadband access combined with the ubiquitous Internet is the great enabler that extends the ability to collect and share information around the world in mere seconds As of the first quarter 2006 the United States still led in total number of broadband subscribers with over 48 million China was in second place with over 41 million and Japan was in third place with 23 million subscribers If the growth in the number of subscribers continues at its current rate China is expected to pass the United States sometime next year although this growth rate has slowed significantly in the past two quarters Despite these current figures however China still lags the United States significantly in household penetration with only 8 62 percent of households having Internet access Broadband access via cellular mobile networks promises to increase the number of broadband subscribers Although second-generation 2G cellular mobile networks are able to provide data connectivity equivalent to slow dial-up links they are not sufficient to provide truly mobile broadband wireless access Third-generation 3G mobile networks and 2 SG enhancements for existing networks are adequate to provide packet-based communications that can reach broadband speeds of 200 kbps or better 39 High-speed downlink packet access HSPDA also known as 3 SG will require only incremental upgrading as opposed to replacement costs of other new technologies 40 3G mobile data services are currently available in major metropolitan areas in Europe Asia and the United States and the next versions of 3G technologies are likely to achieve widespread metropolitan coverage by the end of 2007 Because voice revenues are declining companies are looking to data services to offset these lower earnings As a result they are motivated to invest heavily in their networks and improve the available services 41 39 Burton Group Mobile Broadband Wireless Access Make It Quick Midvale UT November 30 2005 4-5 40 CNET Asia April 24 2006 41 Paul DeBeasi Mobile Data Services So Many Choices So Little Time telebriefing Burton Group Midvale UT July 2006 15 FOR OFF'ICf1llL Y F ON Even newer technologies are expected to fuel the expansion of broadband access into increasingly remote areas One such technology WiMax also known as fourth-generation wireless or 4G is expected to provide broadband access in rural areas not currently served by hardwire access 42 This technology has received recent boosts from industry investment although it may face a significant cost challenge from 3 SG technology in locations that have already invested in 3G infrastructure Some question whether 4G technology will succeed given the expense of building such wireless networks and the relative cheapness of fixed-line access But other countries are investing heavily notably Japan where the government has made leadership in 4G a national goal and is investing millions of dollars in research The primary demand may come from countries where this technology will be the first to offer broadband access to remote areas rather than replacing existing technology One source has indicated that the IEEE 802 16 2004 version of WiMax is being adopted by carriers in developing countries as their primary means for providing broadband services by competitive carriers globally to penetrate new markets and by large incumbent carriers to extend their broadband networks into rural areas 43 A further effort that will push broadband access to more remote areas is the development of a windup laptop that will cost only $100 to manufacture This machine will only be sold to governments in developing countries for distribution to their nation's children 44 2 4 2 Cellular Telephones The significant increase in mobile telephone penetration around the world parallels the rapid expansion of broadband and its supporting networks The greatest impact of cell phone growth is being seen in countries where landlines were never installed in significant regions and where installing them would be prohibitively expensive 45 As of December 2005 more than 2 billion people had cell phones It is estimated that there will be 3 billion cell phone users worldwide by end of 2008 China alone is expected to reach the 600 million mark by 2009 42 WiMax stands for Worldwide Interoperability for Microwave Access and is based on IEEE 802 16e Broadband Strategies for the Fixed Market report abstract June 1 2006 available at www marketresearch com map prod 13003 73 html 44 $100-laptop Created for the World's Poorest Countries NewScientist com News Service November 17 2005 http www newscientisttech com channel tech dn8338-1 OOlaptop-created-for-worlds-poorestcountries html 45 Mobile Phone Proliferates A Hallmark of New India New York Times September 15 2006 C-4 43 16 FOR OFFICIAL USE ONLY FOR OFHClt' L USE ONLY Despite the rapidly changing nature of the cellular telephone industry R D spending by the telecommunications giants fell between 2000 and 2004 the latest year for which data were available The drop in spending by these companies is expected to continue at least through 2006 Despite the falling R D spending cell phones can now provide an increasing number of services that extend well beyond voice communication to include text messaging FM radio reception satellite positioning and video recording 46 These new devices are at the intersection of three key industries communications devices computers and consumer electronics and are the best-selling devices in all three of these categories Traditionally a few vertically integrated companies such as Nokia Motorola and Ericsson dominated the industry In recent years barriers to entry have fallen resulting in a completely new industry structure that involves many smaller firms many of which design as well as build handsets The largest of these original design manufacturers ODMs are located in Taiwan China and South Korea The rise of ODMs has meant that for example Motorola and Sony Ericsson outsource 35 percent of their manufacturing and no longer design their own radio chips 47 2 4 3 Internet Standards Standards for Internet use are also undergoing change The next generation of the Internet Protocol IPv6 is gaining momentum in South Asia and will be supported in Windows Vista The new protocol will provide a greater supply of Internet addresses improved configuration capabilities mandatory support for IP security and quality of service and simpler merging of networks At a meeting of the Open Source Intelligence Forum in October 2006 Major General ret Dale Meyerrose chief information officer of the Office of the Director of National Intelligence ODNI stated that the DoD and ODNI published a joint strategy to move to Internet Protocol version 6 in June Additionally Defense modified a number of its contracts specifically those around netcentric services so ODNI could use them more easily 48 Although operators in Asia have been ordered to support 1Pv6 U S IT managers have not acted to adopt the standard Some have suggested 46 47 48 Battling for the Palm of Your Hand The Economist April 29 2004 Id Jason Miller Intel IT Is Coming Together Washington Technology October 20 2006 17 FOR OFFICIAL USE 6NLJPY FOR OFFICIAL USE ONLY San Diego Huawei has little transparency in its governance and ownership structure but clear ties to the Chinese government and military with significant Chinese government funding credit Huawei has seen significant growth in market share in many critical areas of the Internet and telecommunications The company reaches over 100 countries works with 28 of the top 50 telecommunications operators and services over one billion subscribers Figure 6 A report by Heavy Reading a market research firm SO found that Huawei ranked eighth among wireline-equipment suppliers up from 18th last year Cisco ranked first Most strikingly Huawei ranked fourth in service and support The report calls Huawei' s ascendancy astounding and says it has already surpassed several established vendors in perceived market leadership Table 1 taken from the report illustrates the extraordinary impact that Huawei already exerts on the market $6 000 $5 000 $4 000 $3 000 $2 000 $1 000 $0 -- ---- - - - -- - Revenues $ mil - 2001 2002 2005 2004 2005 Figure 6 Huawei Revenues Huawei' s regional presence includes 39 Sub-Saharan countries and offices in 13 Asia-Pacific countries and 11 Latin American countries Huawei is the largest CDMA total solutions provider in the Middle East and the North Africa region and has a North American subsidiary FutureWei located in Plano Texas so Scott Clavenna Remade in China Huawei and the Future of the Global Telecom Market Summary available on line at http www heavvreading com details asp sku id l 160 skuitem itemid 939 promo code aff code next url %2Fdefault 3SJ %3F 19 FOR OFFICIAL USE ONLY Table 1 Huawei's Market Presence Penetration Service Wireless Terminal o o o Wireless Network o o o Fixed Network o o o o o o Optical Network o o o o Data Communications o o Product sales grew over 100% in 2005 Markets data cards for cell phones and other wireless equipment via Vodaphone Markets handsets in Europe Latin America and Asia via partnershios with Vodaohone Tata and other e iuioment makers Mobile service product market share has doubled in each of past three years Reaches 140 million subscribers worldwide via partnerships with 22 of top 50 mobile carriers including Vodaphone Orange Group France Telecom and Royal KPN Netherlands Largest global soft switch equipment supplier servicing over 50 million subscribers in 40 countries Develooin2 TD-SCDMA with Siemens Largest NGN provider in the global VoIP market with 29 3% market share in terms of port shipments Dittberner 3Q05 Largest provider in the global IP DSLAM market with 32% market share Infonetics 3Q05 Largest provider in global MSAN market with 32 3% market share in terms of port shipments Infonetics 3Q05 Second largest provider in the global DSLAM market with 16 9% market share Products being adopted by many carriers in Western Europe Largest provider in global long-haul DWDM market with 15 9% market share Second largest provider in the global optical network market with 10 3% market share Emerging as a mainstream equipment vendor to major carriers in Asia and Western Europe Currently expanding into Russia Brazil Romania and Saudi Arabia Products deployed in 91 countries including UK Germany Spain Russia Singapore and South Korea Third largest provider in global carrier Ethernet switch router market with 7% market share after Cisco 53% Alcatel 19% and Lucent 5% 2006 Source http www heavvreading com details asp sku id l 160 skuitem itemid 939 promo code aff code next ur1 %2Fdefault asp%3F FOR OFFICIAL ttSE ONLY 3 IMPLICATIONS CHALLENGES AND 0PPORTUNmES The National Security 21st Century Commission's stress on communicating the scale and pace of change has been borne out by extraordinary developments in science and technology since the Phase I report appeared o The mapping of the human genome was completed o A functioning quantum computing device was invented o Organic and inorganic material was mated at the molecular level for the first time o Basic mechanisms of the aging process have been understood at the genetic level Any one of these developments would have qualified as a breakthrough of the decade a quarter century ago but they all happened within the past eighteen months as of October 2006 This suggests the possible advent of a period of change whose scale will often astound us The key factor driving change in the U S national security environment over the next 25 years will be the acceleration of scientific discovery and its technological applications and the uneven human social and psychological capacity to harness them Synergistic developments in information technology materials science biotechnology and nanotechnology will almost certainly transform human tools more dramatically and rapidly than at any time in human history 3 1 RESEARCH AND DEVELOPMENT The internationalization of both scientific research and its commercial development will have a significant impact on the United States' ability to harness S T for the advancement of national security U S strategy must create a balance between two key aims The strategy must seek ways to reap the benefits of a more integrated world in order to extend freedom security and prosperity for all people At the same time it must strive to dampen the forces of global instability so that those benefits can endure and spread 21 FOR OFFICIAL USE ONbY FOR OFFICIAL tfSE ONLY The Department of Defense has come to rely on the private sector for certain technology developments while the private sector is moving offshore much of its industrial and technology production and some of its technology design and research and development This is taking place concurrently with China's growing position at the center of the technology supply chain raising the prospect of future U S dependence on China for certain items critical to the U S defense industry as well as vital to continued economic leadership st For example the DoD's trusted and assured supply of highperformance microchips is in jeopardy due to the restructuring of the U S commercial integrated circuit industry which has moved operations offshore to Taiwan Singapore and China 52 Other leading U S science and engineering institutions are following suit even the Massachusetts Institute of Technology has established an outpost in China The rapid global expansion and technical convergence of digital communication systems means there will be widespread deployment of advanced technologies that allow almost any player- not only national intelligence services-to communicate relatively securely This also increases the possibility that U S operations may be discovered and compromised while new technologies such as commercial encryption VoIP applications or advanced monitoring and intercept systems permit heightened internal defenses against U S collection efforts 53 Because industry now dominates R D so strongly these new tools and technologies are entering the global consumer market before the Intelligence Community can fully appreciate and or compensate for their intelligence and counter-intelligence impact 54 The length of time required to exploit particular U S innovations is also shortening significantly Joint ventures partnerships and foreignowned U S -based subsidiaries can offer foreign interests easier access to sensitive U S technology and information As rapidly as the United States develops and installs new tools to protect borders weapons data or intelligence our adversaries are developing new ways to defeat them or to use them for their own purposes ss Globalization thus complicates efforts to ensure that critical national security and defense equipment and software are built maintained and 51 China Commission supra 85 Ibid 97 53 Id 54 Id 55 Id 52 22 FOR OFFICIAt JSF ONJ Y supported by appropriately vetted and cleared U S firms and personnel As economic and political pressures drive the U S government and U S firms to take on foreign partners or outsource work to foreign firms it is becoming more difficult to control access to sensitive information At the same time however globalization offers opportunities if the Intelligence Community can exploit it and technological competition to provide new possibilities for recruiting sources collaborating with researchers to prevent technological surprise and working judiciously with close partners to leverage scarce resources and intelligence to achieve common goals 56 3 1 1 Disruptive Innovations Certain innovations have the potential to alter fundamentally the way the Intelligence Community and its partners operate around the globe These innovations will have broad implications from accelerating information transfer to affecting the ability to operate in secret to altering the balances of economic and political power To build a strategy to deal with these innovations the Intelligence Community must understand the U S position in each of these fields and how these impacts may play out A study by RAND for the National Intelligence Council attempted to address the feasibility of many of these innovations Table 2 lays out the conclusions The letter G in parentheses after the item indicates that these items are expected to have a global impact Counterintelligence in the Time of Rapid Change The Impact of Technology and Globalization June 26 2006 56 23 FOR OFFICIAL tJSE QNI y F OR OFFICIAL USE ONLY Table 2 Technical and Implementation Feasibility of Illustrative 2020 Technology Applications Tablt S 1 Ttthakal and hnpltmtntation Fusibility ofIDustratin 2020 Ttthnolocy Applitation- - T - -- -- l l -- Highly Feuil M Moy utiaf ' o IM cl foro mHium or la mmet but - oigniflcont publio policy iMun r J_ - L r 5 M S tiatiN o ofrong nNd foro lvJo morbt MKI raisu no oignilfco nt public policy iAu ' ' 1-1-- o Tql9 Onig Deliwly 5 M o UbiquitDus AcclSS ill Ml o Ubiquitous RFIO Tagging 4 G o Genlt c ScrHning 2 G o CBRN Sensors on ERT '2 Gi o GM Crops B M o PlfVHM S sors 4 G o GM Anmllls b R O 2 M o Uncanventionill T111115f1C11t SotioliN o otTo'lf nMd l'or o medium marlror Mtd an no oignffkllnt public polh y iAuH SI o Chup Solil ' 8'11 'gy 1O MJ o Drug Dewlopn- m frcm Sn ting 2 M o Fiian ind Catays s 71 l t FH illle -- o implams far rxUlG 3nd ID 3 M o GrMn Manubcturl'g 1 e Ml o Moniaing and Comrol OISHH X 1 M Milllageinent 2 M ' o Hybrid Vehiclft 2 G o lnlilmlt JDr pwposn d compirisonJ 7 G o Rapid Bioasu s 4 G o Rini Wireless Comms 7 G OiagnoAc Sid Surgical Mdlcos 2 G o Crypliogr 1phy 2 GJ o o Snmt Sys s Pl ' _ o Tissue v - 1 o Cormwrcaal UAVs 11 M Un-utn UJ Unlirelj' - HiQhly UnliJ - - o Higtt-Tech T 3 M Mlitly 2 G o M i Uy Roboeics 2 G l nn na '4 MI o Biomeoics as ICN JO 3 M o C8RN Sensor Nltwark in Cities 4 M o G ie Thenlpy 2 G o GM 1nsec 15 UI o Holpbl Rd lotics 2 M o 5-n VMMc Monlloring 3 M o Tlw lpiK baud on S1MI Cel R D 5 MI o Erin ad RIOCJWllfY 3 M o lnwnunolhenlpy 2 M o TINllMntsfrom Om 2 M o Snmt Texliles 4 M o WNrable Compulln 5 M a mpc far er- 4 M o Drugs TMcncl to Genltic s 2 M o Cheap AulDncmous Housing 11 G o Prim-10 QnMr- ob 2 G o GalRC Selection d Olhprinv 2 M o Artificial Mu5CM Md rissu 2 M o Vlhicln 2 G o Ei ctroNe Transactions 2 GJ o IQnds fte Computlr 2 G o n s iico R O 2 G o Rnstlnt oxtift 2 G o S-DmTr m 2 M o Memory-Enhill1c ing Drugs 3 M o Rabobc SOtnlist t M o Soldi9s 2 M o Proxy-tlol 3 M o QIUl1Un 3 M Source Richard Silberglitt et al The Global Technology Revolution 2020 In-Depth Analyses RAND 2006 p xix 24 FOR OF'FICtJ rL US E Q NI y FOR OFFICIAL 051 ONLY 3 1 1 1 Nanotechnology One field of particular interest is nanotechnology which touches upon a broad array of disciplines including chemistry biology physics computational science and engineering Like information technology nanotechnology has the potential to impact virtually every industry from aerospace and energy to healthcare and agriculture 57 In 2005 worldwide spending for nanotechnology across all sectors totaled $9 5 billion up 10 percent from 2004 Virtually every country that provides financial support for science and technology R D has a nanotechnology initiative Of the $4 6 billion spent by governments on nanotechnology R D in 2004 the United States led in absolute terms but Asia as a whole now spends as much on nanotechnology as the United States does The trends incontrovertibly show significant increases in spending by all nations particularly since 2000 Roughly two-thirds of U S federal funding for the National Nanotechnology Initiative NNI flows to university researchers 58 Although these programs may have a significant impact on the future of nanotechnology in the United States that impact is not easily captured in traditional government industry spending measures In reality however U S government spending is not keeping up with opportunities The current administration's FY 2006 budget proposed a decrease in funding from the level of support provided by Congress in FY 2005 59 The 2007 budget request is also less than the estimated 2006 spending Thus the U S figures over the next few years may show a decline while foreign spending is expected to continue to rise Researchers reported in 2005 that NSF received 48 proposals in its most recent solicitation for Nanoscale Science and Engineering Centers but could fund only 6 60 Just as is true of overall S T expenditures the private sector not government accounts for the majority of nanotechnology spending in the 57 President's Council of Advisors on Science and Technology PCAST The National Nanotechnology Initiative at Five Year Y Assessments and Recommendations ofthe National Nanotechnology Advisory Panel Washington DC May 2005 5 58 Neal Lane and Thomas Kalil The National Nanotechnology Initiative Present at the Creation Issues in Science and Technology Summer 2005 http www issues org 21 4 lane html 59 Id 60 Id 25 FOR OFFICIAL USE 0NbJPY FOR OFFICIAL lJSE ONLY United States The majority of corporate spending on nanotechnology R D worldwide also occurred in the United States A 2005 study identified approximately 600 companies in the United States or with significant U S operations that are engaged in nanotechnology R D manufacture sale and or use While the United States spends more on an absolute basis for nanotech research than any other country when spending levels are adjusted for purchasing power parity the per capita spending in the United States is only fourth in the world 61 In addition some countries that the United States considers strategic threats such as Iran have nanotechnology programs Experts agree that the trends indicate a steady erosion in the United States' lead in nanotechnology Moreover although other nations may not be spending as much as the United States overall they are choosing to concentrate their efforts in particular sectors to make significant advances in those sectors more quickly For example as of 2005 it was reported that China had 3 000 researchers engaged in nanotechnology related programs and over 800 companies working in the nanotechnology field and is concentrating strongly on development of nanomaterials Chinese researchers are now publishing more research papers on nanotechnology although one source suggests that the United States still has over 50 percent of the annual high-impact publications Sean Murdock the executive director of the Nano Business Alliance testified in June 2005 that currently the United States is leading the world in nanoscience but the lead is narrow and we face stiff and accelerating competition He further argued that nanotechnology will be a game changing technology and is likely to be the engine of innovation for the next fifty years At the same hearing Matthew Nordan of Lux Research Inc testified that while the United States leads the world in nanotechnology today its position is tenuous The President's Council of Advisors on Science and Technology reported in May 2005 that the trends in investment publications and patents all show a steady erosion in the United States' lead in nanotechnology Between 2001and2004 the U S share of global government spending on nanotechnology has dropped even though the actual spending doubled from $465 million to $960 million Figure 7 Although the United States spends more on an absolute basis for nanotech research than any other country it is falling behind Asian countries on a relative 61 Id 26 basis The $130 million in estimated government spending on nanotech in China equaled $611 million when adjusted for purchasing power parity-38 percent of U S expenditures This placed China second ahead of Japan and Germany In addition some countries that the United States considers strategic threats such as Iran have nanotech programs Figure 7 U S Share of Global Government Investment Is Declining China recently promulgated its first standards related to nanotechnology and is currently seeking to develop a complete set of standards to be adopted by the International Standards Organization and thus shape the future of nanotechnological development The United States Japan and some European countries are working on their own set of standards to try to create an alternative framework for the future direction of nanotechnology Some nanotech industry leaders express concern that China's lax enforcement of intellectual property rights makes competition with China difficult if not impossible Chinese manufacturers are stressing their ability to deliver products identical to those of U S and European companies at prices 15-20 percent lower Because they generally refuse 27 FOR OFF1CtkL l 1SE ONLY FOR OFFICIAL USE QNI to identify their production processes some suspect that they are using Western patent filings like recipe books 62 3 1 1 2 Biotechnology The development of biotechnology around the world is likely to be very uneven For example while Asian countries appear poised to move toward use of genetically modified foods and organisms concerns over ethical issues and environmental risks are likely to pose a barrier to similar developments in the European Union 63 The impossibility of containing knowledge within country borders as a result of the increasing flow of information people and resources means that cautious countries cannot control the actions of less cautious countries and or entities The emergence of significant private-sector investment around the globe for research in the areas of stem cells and cloning exemplifies this dilemma 3 1 1 3 Quantum Computing The Centre for Quantum Computation a combined initiative by Cambridge and Oxford Universities lists nearly 100 separate quantum computing research programs in universities private industry and international consortia in Asia Europe Asia North America Oceania and South America These program are developing the research foundations for this critical technology and sharing the results worldwide The university programs attract and train the best students regardless of country of origin By contrast many of the U S programs have the objective and maintaining the U S lead in this very competitive area The openness and collaborative style of the research necessary to make advances are of critical importance to the IC yet the U S programs lack these characteristics 3 1 2 Observations In its 2006 report The Global Technology Revolution 2020 In-Depth Analyses which it prepared for the National Intelligence Council the RAND Corporation reported that it saw no indication that the Id Richard Silberglitt et al The Global Technology Revolution 2020 In-Depth Analyses Santa Monica Calif The RAND Corporation 2006 62 63 accelerated pace of technology development is abating and neither is the trend toward multidisciplinarity nor the increasingly integrated nature of technology applications RAND also noted that many of the technological applications are controversial and that political considerations may affect their development in various countries For example countries show varying concerns regarding genetically modifying crops genetically modifying insects genetic screening for humans gene therapy and genetic selection of offspring Other applications of technology have significant implications for privacy and personal freedom Examples of these would be pervasive sensors some uses of radio frequency identification RFID implants to track and or identify individuals chip implants in brains and biometrics as the central means of personal identification The report notes that in light of the accelerating pace of technology development and the rapid improvement of capacity to acquire and implement technological applications TA in emerging economies maintaining country position in relative capacity to implement T As will require continuing efforts to ensure that for example laws public opinion investment in R D and education and literacy are drivers for and not barriers to technology implementation In addition infrastructure needed for desired TAs must be built supported and maintained 64 It should also be noted that the United States cannot control the ethical political and or economic environments in other countries that affect decisions regarding whether to invest in particular technologies Thus innovations that raise ethical environmental or political concerns for the United States may be developed in environments that do not share U S views The growing dependence of U S academic institutions on federal research funds coupled with the large proportion of foreign-born students and faculty members raises additional questions 3 2 INFORMAITON ACCESS In the Internet age information technologies may be used to empower communities and advance individual freedoms but they can also empower political movements led by charismatic leaders with irrational premises and anti-democratic goals Such men and women in the 21st century will be less constrained than those of the 20th by national 64 Id 29 FOR OFFICIAL USE ONT Y boundaries and less dependent on gaining large industrial capabilities to wreak havoc For example for an investment of as little as $50 000 a few people may manage to produce and spread a genetically altered pathogen with the potential to kill millions of people in a matter of months Clearly the threshold for small groups or even individuals to inflict massive damage on those they consider their enemies is falling dramatically 30 FOR OFFICIAL tJSE QNI y _ FOR OFFICIAL USE ONLY 4 CONCLUSIONS AND RECOMMENDATIONS 4 1 CONCLUSIONS We have led the world for decades and we continue to do so in many research fields today But the world is changing rapidly and our advantages are no longer unique 65 The situations and trends summarized above and described in greater detail in the Appendixes to this report strongly support the conclusion that the forces of globalization and rapid access to information worldwide have profoundly changed the environment in which the IC must operate They may significantly reduce the advantage the IC has enjoyed as the result of decades of U S dominance in S T and at the same time extend the development and benefits of leading-edge S T to countries and actors inimical to U S interests Not surprisingly considerable informed debate surrounds the implications of this 21st century phenomenon and whether the diffusion of potentially important advances in S T ultimately benefits or harms the United States In the intelligence domain however we conclude unequivocally that this altered landscape threatens the S T preeminence that the IC has relied upon-perhaps too complacently-since the formation of the modem Intelligence Community with the National Security Act of 1947 To safeguard U S national security the IC must make fundamental changes in the way it operates within today's world of complex threats and potentially disruptive and revolutionary advances in S T The IC must greatly improve its ability to assess the impact of S T developments on the countries and non-state entities with which the United States competes and over the full range of U S national security priorities To do so the IC must itself apply competitive S T developments that enable collection and analysis in the broadest sense Yet the IC is not taking full advantage of opportunities offered by the new borderless world For example globalization means that more U S citizens businesspersons academics and students than ever before are living or studying in foreign countries or working for foreign-owned entities worldwide There are more foreign-born people in with the United States with profound knowledge of the language and culture of 65 Gathering Storm 31 FOR OFFICIAL USE 9NLY FOR OFFICIAL USE ONLY countries that the IC often can only read about The IC needs to find better ways to tap both of these potential sources of information Similarly we find that the IC fails to take full advantage of the enablers of the unprecedented diffusion of S T the Internet and broadband access At present the primary elements of the IC provide their staff with workplaces and tools that are simply inadequate to keep pace with the dynamic world environment We find that the stovepipes of S T analysis and collection are unfortunately alive and well Analysts task collectors for information they need Collectors in tum use the tools at their disposal including S T enablers to find what the analysts seek This serial process is a relic of the Cold War that neither utilizes nor even recognizes the full scope of assets that S T can and should provide especially against the complex granular threat that the IC confronts today In the current environment the IC must find and locate individuals who constantly move delve into their motives and intentions and understand far more about nations and non-nation state actors than it does now It will take analysts S T experts and collectors working together not serially to determine what S T can offer to technical and human collectors and to analysts to meet IC needs Just as important only such a multidisciplinary team can recognize the limitations of current technology and determine the new S T advances that the IC needs and should support We recognize the difficulties of making significant changes transformational changes - in the IC a set of widely disparate organizations whose successes are secret and whose failures are public Change requires risk and risk means accepting the possibility of such failures Even so many dedicated and innovative professionals recognize that the IC must break through the established stovepipe ways of doing business to a new multidisciplinary model They have kindled isolated sparks of change throughout the community Unfortunately we have every reason to believe that the forces of tradition will dominate and that those sparks will sputter and fade without encouragement by the highest level of leadership The following recommendations were inspired by these creative sparks At the very least the IC should institute some or all of them in an experimental fashion and evaluate their effectiveness in helping U S intelligenceto adapt better to today's challenging world This cannot 32 FOR OFFICIAL USE ONLJPY_ FOR OFFICIAL USE ONLY occur in any meaningful way or in a relevant timeframe without the direct and active support of the Director of National Intelligence 4 2 RECOMMENDATIONS The concept of a community S T organization can be traced back to 1999 when a report by the President's Foreign Intelligence Advisory Board on the total inadequacy of IC S T - both the development of technical systems and the analysis of technical intelligence - prompted a presidential directive to correct this deficiency The directive led the IC to create the position of Chief Technology Officer and to provide community funds to establish what is now the Intelligence Technology Innovation Center mC The IC also initiated another community program the Advanced Research and Development Activity which has evolved into the Disruptive Technology Office DTO Both of these programs have enjoyed some measure of success but progress has been evolutionary at best The rate of change in the threat and the growth of worldwide competition in S T clearly indicate the need for a greater more unified effort 4 2 1 iARPA In a recent series of addresses the Director of National Intelligence DNI announced plans to form an R D program for the IC that draws upon lessons learned from the Defense Advanced Research Projects Agency DARPA The proposed iARPA would model itself on those characteristics of DARPA that apply to the IC This concept is not new In 1999 the ISB's predecessor organization the Advanced Technology Panel ATP published a paper by Danny Hillis and Lionel Olmer that discussed such an initiative The paper was written at the request of the Director of Central Intelligence in response to a Congressionally Directed Action that raised the issue of an IC research organization along the lines of DARPA-that is an iARPA While supporting the concept the ATP noted Crucial for an ARPA would be a enough money to do something good b enough time to show success c organizational independence and d a strong director with technical stature More recently in a speech presented at the Woodrow Wilson International Center for Scholars in September 2006 the DNI noted that the National Academy of Sciences had proposed an emulation of DARPA for the Department of Energy to be known as ARPA-E The 33 FOR OFFICIAL USE ONLJPY- FOR OFFICDtt l JSE ONJ Y_ National Academy recommendation stated that ARPA-E would have a very small staff perform no research itself would tum over its staff every 3-4 years and would have the same personnel and contracting freedoms now granted to DARPA 66 The Academy also suggested that ARPA-E be an independent organization with its own office space and be led by a respected technical professional During a recent ISB quarterly meeting centered on organizational issues for enterprise-level R D organizations Dr Frank Fernandez former director of DARPA commented on the unsuccessful attempt by the Department of Homeland Security to replicate DARPA He noted that HS-ARPA as it was called could not hire staff had no office space and ran programs that lasted no longer than six months By contrast he identified three factors critical to the success of DARPA the right staff and leaders adequate resources and top-level support meaning Congressional backing We enthusiastically endorse the iARP A concept but urge the DNI to establish the program in a manner that maximizes the probability of success The effort has strong support across the community but only if it is carried out correctly The right to fail professional technical management and adequate resources of both staff and money allowed DARPA to succeed These same elements combined with the time to try and try again are the key ingredients of successful human intelligence HUMIN1 Unless they are also key elements of an S T effort that will enable the new HUMINT that the IC now so desperately needs iARPA cannot succeed More specifically if iARP A simply combines existing programs all of which lack adequate staffing and finances it will maximize the probability of failure not success That legacy would have agonizing consequences As the National Academy suggested for ARPA-E we recommend that the iARPA program have a rotational staff and that half of this staff come from the private scientific community and half from the IC Staff assignments should last no less two years or more than four years This constant infusion of new talent and new ideas would yield obvious benefits to the IC Scientists on rotation to iARPA would learn what intelligence needs and would remain valuable resources for the IC when they return to their home assignments Just as critical intelligence analysts on rotation to iARPA would gain a better understanding and 66 Id 34 FOR OFFICIAL t1SE 91 U v_ appreciation for the basic areas of S T in which they must assess progress by other countries and the potential damage or disruption to our national security Like DARPA iARPA should be a multilevel security program that enables the use of modern IT tools Current security restrictions and the lack of up-to-date equipment prevent many IC professionals from performing their tasks as quickly or as effectively as they might otherwise Finally and just as critical we urge the DNI to exercise his reallocation authorities and ensure that iARP A is funded at a minimum of double the level of the existing organizations ITIC and DTO that are being transferred into this new program This would make discretionary funding available for new ideas and for longer term programs 67 and avert poaching on programs already underway Without this level of funding without the expectation that failures will outnumber successes and without an integrated mix of talented personnel from within and outside the IC who are experienced across collection and analysis the new enterprise will simply replicate what already exists do what we have always done get what we have always gotten achieve what we have always achieved 4 2 2 Remove Artificial Boundaries The current model in which collection S T and analysis are separate functions bounded and enforced by separate organizations is wrong for today's problem set Many within the IC recognize its shortcomings and are working at their own levels to address them Yet the DNI' s own organization with separate directorates for S T Collection and Analysis lends support to those who resist changing this Cold War holdover Once again the DNI should endorse by words and action the need for a more efficient system 68 We recommend that the DNI lead the effort to change the old organizational philosophy by restructuring the Office of the DNI to reflect a multidisciplinary approach Numerous examples of ways to 67 Recall that in the CORONA program launch after launch-eleven in all by May 1 1960 eight of which carried cam resulted in failure The only variation was in the cause 68 Toyota learned this production approach in the late 1990s and now thrives as the once-dominant U S auto industry giants are in junk bond status See James P Womack Daniel T Jones and Daniel Roos The Machine That Changed the World The Story of Lean Production New York Harper Collins 1991 35 - FOR O F FI --c-IA-t -USEONLY achieve this have emerged from all levels of the community We cannot cite the one best-or even good enough-method or identify what it would involve We do however recommend that the IC initiate a number of experiments that will help lead the way and at the same time address key problem areas without causing serious disruption to the current organization We assume that leaders within the DNl's three organizations already have significant interaction The goal would be to reflect that interaction in an organizational structure that would allow all IC professionals to share in this kind of collaborative working environment among and between the current stovepipes 4 2 3 Tap New Resources Resulting from Globalization We recommend that the DNI encourage the IC to recognize and take advantage of the resources that globalization offers More U S citizens than at any previous time in history hold various positions in foreign and foreign-owned companies all over the world Yet the IC still uses the collection approaches that were developed in decades past Because these approaches rely strictly on trained intelligence professionals they are relatively safe pose lower risk However they provide nowhere near the potential payoff that would allow IC professionals to gain better understanding not only of specific issues but also of the culture interests and intent of those whom we claim to understand in our formal assessments Nothing can replace direct interaction even virtual interaction across the Internet and collaboration sites between these resources and the IC professional who must prepare the assessments Similarly we now have an unprecedented number of foreign students studying in our premier graduate schools U S students studying abroad and even foreign-born naturalized U S citizens at work in high-tech companies both in the United States and overseas The information they possess and their impressions of what S T disciplines and developments are important to other nations and what progress those nations are making can prove critical to the IC We recognize the possibility that such people may have divided loyalties but the combined expertise of collectors analysts and S T subject experts should enable the IC to identify reliable and knowledgeable sources Again direct interaction would prove essential as opposed to the use of intermediaries who collect data and then finalize a report We offer the following recommendations to help the IC take advantage of the new resources provided by globalization 36 1 Allow IC professionals to participate directly in worldwide collaboration programs of interest Taking this one step further the DNI should sponsor such collaborative efforts 2 Allow IC professionals direct access to knowledgeable people involved in foreign or foreign-owned companies of interest even if these people have no formal connection to the IC By working in teams that combine expertise in collection analysis and S T the IC professionals who make these contacts should break down some of the barriers to this type of direct relationship For example having an S T expert from the IC interact with the private sector source would probably elicit more and more useful information than relying on a person who lacks specific S T knowledge It is essential that the IC adopt new approaches for interaction and collection against the most important areas of S T without delay Only a small focused effort can ensure that this is done most effectively - that is in areas where the benefit to our national security interests will be the highest-and in ways that do not jeopardize either ongoing sensitive activities or place our own secrets at risk We recommend that the DNI direct a group of collectors analysts and S T subject experts to identify several S T areas especially likely to provide real insights into disruptive technologies as well as areas where technologies of potential collection advantage to the U S IC might be found On the basis of this information interaction and investigation by collectors and analysts should identify those target foreign companies and the U S individuals on their staff who are most likely to have access to these technologies With this as a focus the DNI should oversee a new approach to interaction between IC experts- operators as well as analysts- and these key resources This approach would allow for a full range of engagement with sources from traditional agent recruitment by clandestine HUMINT operators to development of more nuanced but nonetheless critical relationships by IC analysts and other subject matter experts 4 2 4 Utilize the Talents of Those Awaiting Results of the Lengthy Clearance Process We offer the following recommendations to help the IC make better use of its full staff capabilities 1 Provide a means to make productive use of people selected for IC employment who are undergoing the seemingly endless security 37 FOR OFFICIAL USE 0NbJPY - FOR OFFICIAL VSE Ql U v investigation process The IC should put these candidates to work in a multilevel security environment that permits them to contribute immediately even if not at the level of the desired final clearance andmost important-allows them to use the state-of-the-art IT tools available to the rest of the world 2 Provide a means to employ immediately those foreign-born naturalized U S citizens whose clearance process may easily take years to complete-with the chance that they will never obtain more than collateral clearances The IC desperately needs to tap their knowledge of the language and culture of their home countries and of groups of interest The IC should create the appropriate unclassified or collateralonly environment and again provide them with modem IT tools 4 2 5 Accept and Encourage Risk Taking We recognize that much of what we recommend involves change and that regrettably pervasive risk aversion hobbles innovation in the IC more severely than ever in the past The IC must be willing to confront not merely the risk but the certainty of different levels of failure inherent in what we suggest Such failure often implies exposes headlines and finger-pointing that can shorten or end careers This must be balanced against of the loss of life that could result from the current practice of taking little or no risk The dramatic change in the nature of the threat and the potential adversaries we face compounds this problem to critical levels Many organizations private and government now use risk assessment methodologies to quantify in some sense the level of risk associated with any actions taken We recommend that the DNI sponsor a risk assessment approach that will provide some foundation for judging the risks associated with actions such as those we suggest even if only in a relative sense We have taken the approach of making our recommendations directly to the DNI In almost all cases only personal action by the DNI on those recommendations he approves can create the necessary impetus and organizational support that would allow them to succeed 38 FOR OFlfICIA I USE ONLy FOR OFFICIAL tfSE ONLY APPENDIX A RESEARCH AND DEVELOPMENT U S research and development R D spending overall grew to$ 319 7 billion in 2005 growing 2 5 percent from 2004 It is projected that the 2006 data will show continued growth to $328 9 billion largely due to investments by the business sector 69 Although spending has continued to increase overall the sources of funding and type of research conducted have shifted Beginning in approximately 1979 private industry funding for R D overtook federal spending Figure A-1 175 150 LJ - 2 --i 125 I I I ' - J 75 25 ------ _ - --_ - - _ - ------ 0 11lS3 1958 116l 111611 1973 11111 llllll 111118 11193 - 200$ r- iFFROC --and - NOK l all-bl OO nir - SOClllCEo-Sdonoof_ _ _ _ _ _ _ RaD_ _ Figure A-1 U S R D Spending by Funding Sector 1953-2004 The federal share of R D funding fell to a low of 24 9 percent in 2000 It then rebounded to a projected 29 9 percent as the business sector entered a slowdown and federal spending expanded particularly in the areas of defense health and counterterrorism 70 In fact three-quarters of the growth in the government R D budget between 2001 and 2005 is attributable to defense R D 71 However more recent budget figures 69 2005 R D Funding Forecast R D Magazine January 2005 F3 2006 R D Funding Forecast R D Magazine January 2006 F3 70 National Science Board supra 4-5 71 Organisation for Economic Cooperation and Development OECD ience Technology and Industry Scoreboard 1005 Executive Summary http www oecd org document 43 0 2340 en 2649 33703 35455595 1 1 1 LOO html 39 FOR OFFICIAL tfSE ONl L FOR OFFICIAL USE ONLY indicate that funding for federal R D in the FY2006 budget after adjusting for inflation would decline for the first time since 1996 72 This development has significant implications for advancing R D In essence it has meant that control over the types of research conducted has moved to the private sector Because federal and industry funds tend to be used for different types of R D this shift between business and federal spending has had a significant impact on the allocation of moneys among the types of R D A 1 BASIC RESEARCH Most basic research73 is funded by the federal government and performed at universities and colleges Figure A-2 Because the payoff for basic research is often long in coming its results may be unmarketable and rewards diffused among many users the private sector is less likely to perform such research Figure A-3 U S Basic Research by Funding Source 1991 2004 Expenditures In billlono of constent 2005 doHera 60 50 o o -- ----- --- -- - - -------------- 40 ----------------- ---------- 30 o AU Other Sourcn o lnduttry 20 _ _ln __ _ -- AMS -onNsr - - o l l l f D - 1i- 1ot2D04 0 --llt991 _R D iAAAs w v wemJtNV S Figure A-2 U S Basic Research by Funding Source 1991-2004 72 73 CRS Science and Technology Policy supra Ibid 1 40 FOR OFFICIAL USE ONLi FFFl C o t dlra funded -d'I Md dwtlopnolt _ NOTES FVW-rculded -MI09runb RaD oimat d atlltS timlalt In 2004 80URCE NlllloMI FCU dation DlwilkMI of 8lmllltlce 1MoMIAltWMolMD _ e 11lP91 A-3 4-7 4--11 llld 4--15 MdEilfil- v lncbfaq 2000 Figure A-3 Basic Research by Perfonning Sector 2004 Universities and colleges have benefited most from increased federal spending in the past five years Figure A-4 Since 1990 inflationadjusted academic R D expenditures have almost doubled driven by federal and institutional funds These expenditures reached $40 billion in 2003 the second-fastest growth of any U S R D sector The federal government supplied 62 percent of these funds up from 59 percent in 1990 reversing the long-declining share of federal dollars The universities themselves provided an additional 19 percent State government and industry support grew slowly state government funding because of unfavorable budget conditions and industry funding because of retrenchment after the collapse of the dot com industry The share of academic research expenditures directed to the life sciences rose to 59 percent whereas the shares of engineering and the physical sciences declined 41 FOR OFFICIAL USE ONLY - FOR OFFICIAL tJSE ONLY Federal RESEARCH by Performer FY 1970 2005 Obllg8tlono In blHlono of conolonl FY 2006 dollaro 60 50 oAll O Mr 40 oFFROCo 30 OUnlwa Collegu 20 o lnduetry 10 ______ o Fedool 0 1970 1975 1980 1915 1995 1990 2000 2005 _ _ Y 2003 llOf- --- _ 1 - I D I FY lD04 20ll5-- MOY '00 e 200ll N tS Figure A-4 Federal Research by Performing Organization FY 1970-2005 Academic institutions have become increasingly reliant on federal funds for conducting their research Figure A-5 Titis becomes significant in view of the characteristics of the faculty members who actually conduct the research many of whom are foreign born R O at Colleges and Universities by Source of Funds In billions of conlltanl FY 2006 dollora FY 1953 2004 - - - - - - --- --- oAll O UnNs CollegH o Industry o S1111 locoI o Fe lwoI 1953 1960 1967 1974 1911 1911 1995 2002 ---- s w '-C-- --on ---- - y2004 1111 SeeT-S tJ ae' GOP _ MOY '06 e l JOE AA AS Figure A-5 R D at Colleges and Universities by Source of Funds 42 FOR OFFICIAi USE ONLY The subject areas of research funded by the federal government have also undergone significant changes in recent years with the primary increases in recent years occurring in biomedical research conducted by the National Institutes of Health NIH Figure A-6 However in the FY2006 budget after the 1 percent rescission NIH funding in current dollars declined for the first time in 36 years While total federal research funding was budgeted pre-rescission to increase to $135 7 billion representing a 2 8 percent increase over FY2005 estimated funding levels most of the growth was attributable to increases in defense weapons systems and the National Aeronautics and Space Administration' s human space exploration technology program 74 $26 ---------------- - NIH lllomedlal - Enol-lng - Physical Sela resean h -Au oCher life o Clerlc n Env Scla - Malh I Comp Sela Soclll ScleneH - Psychology - $6 -- - I f i I I I Tt I I I I TT'' ' ' 'T I ' I I ' JPYj '' $0 1170 11178 1980 11116 1llllO 1ff6 2000 -ocner nol- oo Ollw includn - r _ 11aic oi l Jle- - -11 9d inlDNH -'lor_r_ _ ondll - - - Source - wpoor1111r 8oottceF- R O lllCilillnl -- --- - - Funda b ' -- FIGlTRE 3-13 Trends in Federal Research by Disciplane FY 1970 -2004 SOURCE AAAS b on NSF Federal F Ulds for Research and De l'elopment FY 2002 2003 2004 FY 2003 and 2004 data are preliminary Constant-dollar co11 -m ious based on OMB's GDP deflector Figure A-6 Trends In Federal Research by Discipline FY 1979-2004 As recent events show however merely budgeting money for research does not mean that it will be spent The Department of Homeland Security DHS failed to spend $200 million in R D money from past years and the funds had to be rescinded Lawmakers and recently retired Homeland Security officials have raised concerns that DHS's R D effort is hampered by bureaucracy lack of strategic planning and failure to use money wisely 75 74 15 Ibid 2 Associated Press Bush Sought to Cut $6 Million in Screening Technology August 13 2006 43 FOR OFFICIAL USE ONLY FO R OFFIC'fl b USE ONLY Basic research has also declined as a proportion of federal funding This is evident for example in the Department of Defense DoD budget although the latest year's figures show some rebounding Figure A-7 C llloOLI _ 1 - 1 eoo 1 T 20 a _ 11 f ITIOI Deo t a1 - -- - - - - - __ _ _ - - - _ _ - _ fl IDIDl T _ -- - - -- - - ---1o a _ --c - -- I- l- 1- - 1- I- '- t'- l - - - -M- 1 - L L t i - - 12 L- L- 10 - -emi 2DD L- - L- - L- I- L- _ __ 1 t1 t-t t -f- 1 l J t-'l t J Jbl _ l 2 1191 1- _ ae JI - v- Source National Science Board S E Indicators 2004 Arlington VA National Science Foundation 2004 Figure A-7 Expenditures in the 6 1 Portion of the DoD Budget A 2 DEVELOPMENT R D Purely development activities that are directed toward the creation of new goods services and processes are primarily funded by industry and constitute the majority of industry R D spending Figure A-8 Thus as support for U S R D has shifted from federal funds to industry funds the amount of money spent on long-term basic research using industry funds has remained relatively flat while spending on short-term developmental projects has increased substantially In 2003 over one-third of all industry-funded R D was concentrated in the computer and electronic products industry and computer-related service companies 76 Former secretary of defense William Perry told the United States-China Economic and Security Review Commission China Commission that basic research i e research aimed at developing new technologies rather than developing new applications for existing technologies is critical to generating future technological advances but that nearly all R D 76 National Science Board supra 4-5 44 FOR OFFICiAL USE 6NLY FOR OFFICfkb Yiii E ONJQ currently undertaken by U S industry is focused on less risky product development involving existing technologies 77 Trends In U S Industry R D 1991 2004 Expendhures In bllllons of constant 2005 dollars 160 Development 140 120 ------ -------------------- -------------------------- i up 89 5% 100 80 --------------------------------------------------------- 60 ---- ------- ---------------------------------- -------- 40 ----------------------------------- 20 ------ -- ------------------------------------------------ 0 -- ---lf--- --l- 4--4- -4--- --'---1 I Applied Research up27 9% Basic Research up4 1% I ' ' ' ' Soww A VIS be9ed on NSF Pallenls cl R D cc rar 2004 - snln WY-l o i - beair'IS 111 1991 cl In NSF mll10dl lar onclultn8I R O that - Inell - R O Exd ma indullry R O f nled by aller 9CMQ S MAY '06 0 2006 A VIS AAAS Figure A-8 Trends in U S Industry R D 1991-2004 A 3 THE SHIFTING NTERNA TIONAL LANDSCAPE The rest of the world has not remained idle while the U S landscape has changed Indeed the National Academy of Sciences Committee on Prospering in the Global Economy of the 2tst Century stated in their report that having reviewed the trends in the United States and abroad the committee is deeply concerned that the scientific and technical building blocks of our economic leadership are eroding at a time when many other nations are gathering strength 78 Others have suggested that the problem is not so much that the United States is in decline but rather that others are advancing quickly from behind putting all their economic resources into moving their countries forward The problem is that even if the United States were doing everything right the world still poses an unprecedented n China Commission 95 Gathering Storm 2 78 45 FOR OFFICIAL tJSE QNLl' FOR OFFICIAL USE ONI Y competitive challenge Unfortunately we are not doing everything right and this compounds the challenges that we face 79 Foreign investment in R D has been growing at a greater pace than U S R D Statistics for Organisation for Economic Cooperation and Development OECD and nonmember economies show that underestimated worldwide R D expenditures unadjusted for inflation rose from $377billionin1990 to $810 billion in 2003 the last year for which data were available Figures A-9 and A-10 The OECD countries' share dropped from an estimated 93 percent to 84 percent of the total over the period the calculation is based on the reported R D expenditures of eight non-OECD members whose 1995-2003 average annual growth rate of 17 1 percent contrasted sharply with the 5 6 percent annual growth for OECD members FlgureQ 6 R D expenditures 1900-2003 or seladlld region and c ountrl s Dolar'8 3Cl0 ----------------------------- 1'10 - 1 _ _L - _ _ _ 1- 1 o _ _ _ _ __ _ 1GQO EU o 19Q9 1Sllil5 1Q07 1GG9 2001 2000 eun p n Union N01E8 All dllta c ek ullllld by for Econcmic ndDw JECqwllh paritlM Data Mo fra'n U 8 dollr GBP0-25 ie EU-15 plu8 10-memblr SOURCE OECO Wn 8c iMc llld Tw lrnology Ylri llM yelft Figure A-9 R D Expenditures of Selected Regions and Countries 1990-2003 79 China Commission supra citing testimony of William Archey 94 FIQlff0 1 Estimated worldwlde R D expenditures 10lil0-2003 Dollerll bllone 900 -------------------------- 800 700 eoo l500 JO c' 300 200 l-- ------ 100 ----------------0 __ _ _ __ _ _ __ __ __ ___ ___ __ _ 19QO 1188 1905 1Q87 1900 2001 2003 EU o lropffn U'lkln OECD 'Organleltlon f Econcm1c Co-ciplnltkln Md Ow NOlE CulNnt dollrw--' wllh pun ihMlng _ perilMe 90LfflCE oeco u m Si M-ant1T t-t- Figure A-10 Estimated Worldwide R D Expenditures 1990-2003 Industry is also increasingly looking beyond national borders as it decides where to locate R D activities The United States remains an attractive venue for foreign companies seeking to conduct R D From 1990 to 2002 R D expenditures in the United States by majority-owned affiliates of foreign-based multinationals rose from 8 percent to 14 percent of total U S industrial R D performance R D expenditures by U S owned companies abroad rose from about $12 billion in 1994 to $21 billion in 2002 Foreign sources supported more than a quarter of the United Kingdom's industrial R D in 2002 while Canada's foreign support rose to 21 percent and that of the 15 European Union members EU-15 rose to 10 percent including within-EU funds flows Notably foreign-owned companies and foreign-born inventors now account for nearly half of U S patents so The global nature of S T markets is also reflected in the rising number of corporate international alliances devoted to joint R D or technology development Industrial innovation increasingly involves external partners to complement internal capabilities share costs spread market risk expedite projects and increase sensitivities to geographic 80 National Summit on Competitiveness supra l 47 FOR OFFICIAL USE ONl rY variations in product markets The number of new international alliances rose from under 100 in 1980 to 183 in 1990 and 342 early in the new century Historically U S companies have been involved in 75 percent to 86 percent of these alliances These multinational corporations and organizations compete against or even overshadow national entities and interests which can result in the blurring of distinctions between government and commercial goals 81 Moreover existing mechanisms to identify foreign membership control or influence over U S firms whose work is vital to U S defense and intelligence systems have proven inadequate to keep up with the rapid changes in ownership control and influence 82 R D spending by U S -based multinationals is increasing in Asia Although Europe remains the single largest location of these R D expenditures accounting for just over 60 percent of the total its share has slipped by about 10 percentage points since 1994 Over this period the combined share of Europe Canada and Japan declined from 90 percent to 80 percent of the total The share of other Asian economies rose from 5 percent in 1999 to 12 percent as R D expenditures by U S -based multinationals more than doubled to about $3 5 billion in the region compared with $1 5 billion during the 1994-1998 period This increase was fueled primarily by steep investment growth in China more than $1 billion in 2002 and rising and the Asia-8 economies U S R D expenditures in Japan increased only moderately 83 By 1999 it was reported that 200 of Fortune magazine's top 500 companies had already invested in China 84 According to data compiled by OECD China's spending on R D reached $84 6 billion in 2003 up from $12 4 billion in 1991 Although the precise international comparability of the data remains questionable this would put China in third place behind only the United States and Japan and ahead of Germany Average annual increases in R D investment over the 12-year period ranged from 4 percent to 5 percent for the United States EU-25 and Japan These contrasted sharply with the 17 percent average annual growth for China which is accelerating for the past five years China's R D expenditures have registered 24 percent average annual increases Over the same period the ratio of China's R D to its 81 Counterintelligence in a Time of Rapid Change The Impact of Technology and Globalization June 26 2006 82 GAO supra 83 National Science Board supra 84 People's Daily 48 FOR OFFICll L USE O JI Y FOR OFFICIAL USE ONLY gross domestic product-indicative of the relative prominence of R D in Chiita' s rapidly growing economy- rose from 0 6 percent to 1 3 percent compared to about 1 8 percent for the EU-15 and 2 6 percent for the United States China's R D expenditures are rapidly approaching those of Japan OECD data Figure A-11 show China's investment at 17 percent of Japan's in 1991 but at 74 percent of Japan's in 2003 Relative to the EU-25 the comparable Chinese figures were 10 percent and 40 percent and relative to the United States the increase was from 8 percent to 30 percent Even if more fully comparable Chinese figures reduced the growth statistics somewhat such a rapid advance in comparison to the leading R D-performing countries and regions would still be unprecedented in recent history Flgur9 7 Chna's R D expencllures relalhre to 9l09e of lJnllBd stallls Japm 1111d EU-25 1991-2003 _ o -- eo - - --- ------ - ---------------- 0 -- - - - -- - - - - - -- - - ---- ---------- ----- ----- - --- --- ------ 20 O 1D01 1003 100G 19117 1 - 2001 20 0 -11 091 UI0 31 ' 806 1Q0 7 11Ge 2001 200S L--L ---JL J- __ 1 -L--L J __ NOTE Al- bpOip' Eu all 1G' _ eo perllie llllCID ecuao OECO MI_ __ _ k pJMCfOECCll - l IW Figure A-11 China's R D Expenditures Relative to Other Nations 1991-2003 The increase in spending is reinforced by the growth in China's industrial research workforce which expanded from 16 percent of the size of its U S counterpart in 1991 to 42 percent in little more than a decade SS By 2003 the ratio reached 66 percent with 862 000 researchers in China compared to 1 3 million in the United States This outstripped both Japan which had 675 000 and the Russian federation which had 487 000 86 The China Commission found that 85 86 National Science Board supra 4--0 OECD supra 49 FOR OFFICIAL USE ONLY- FOR OFFICIAL t l'SE QNLY Science and technology S T development is the centerpiece of China's comprehensive strategy to build national power As a result the Chinese government has a comprehensive coordinated strategy for S T development which it began to implement in the mid 1980s with the 863 program This strategy translates into government policies to encourage growth and investment in key industries among which are software and integrated circuit industries Such policies include foreign investment incentives tax incentives government subsidies technology standards industrial regulations and incentives for talented Chinese students studying and working overseas to return to China Many of these policies make it difficult if not impossible to achieve a level playing field in this area of U S China trade and jeopardize long-term U S leadership in this vital sphere s7 The Commission noted further that Attracting U S and other investment into China has been an important component of this strategy particularly where transfers of technology and know-how have accompanied this investment 88 New industrial technology alliances worldwide reached an all-time peak in 2003 with 695 alliances according to the Cooperative Agreements and Technology Indicators database Alliances involving at least one U S -owned company have represented the largest share of alliances in most years since 1980 followed by alliances between U S and European companies 89 In addition many high-tech companies have begun to locate major research installations outside the United States Figure A-12 A 2004 survey by The Economist reported that the top five countries where comparues intend to increase their R D efforts outside their home country were China the United States India the United Kingdom and Germany Most notable is the dramatic increase in foreign investment in China In 1997 China had registered fewer than 50 multinational corporation research centers By mid-2004 a mere seven years later the Chinese government had registered over 600 such facilities many belonging to large U S -based multinationals 90 Another reliable report said this figure had actually topped 700 91 In 2003 China cited a Fortune 87 China Commission supra 86 Ibid 85 89 National Science Board supra 4-6 9 Freeman supra 91 China Commission supra 88 88 so FOR Oi4'F1Clitrl YSE ONL _ survey showing that over 92 percent of multinational corporations will consider setting up regional headquarters in China in the future 92 RgweC -e Geographic distribution of U S firms' overseas R D 1004 2002 P-t 100r- -- D AM1Pec111c Japen o Jap9fl o Middle Ealt Nrlce o c-de Latin AnM11ca D Ellr'OfH' o ___ __ _ _ _ _ _ ____ 1QM 1QG6 10Q8 1Ql7 11K18 1118Q 2000 NOlE NO pertamMd- 11 mejoflly-- d flnM 2001 _of 2002 U 8 80URCE u a DepMment at o - eur- o1 E- imic afU 8 Dnctl _ _ Ab-' _ h f'- bM dlldl1 hlln e - e1 llttd6Vif-ov Figure A-12 Geographic Distribution of U S Firms' Overseas R D 1994-2002 Over the last decade the share of R D sites based in the United States has fallen from 59 to 52 percent At the saine time the number of sites based in Western Europe has dropped from 24 to 22 percent while sites based in China grew from 4to11 percent and those based in India grew from 4 to 7 percent of sites worldwide Combined China and India are about to overtake Western Europe as the most important locations where U S companies conduct foreign R D In the late 1980s the total share of sites based in countries foreign to the company's home country passed the 50 percent mark and in 2004 stood at 66 percent Data about plans over the next three years for current R D networks of surveyed companies reveal that almost all of the planned growth in foreign R D will be in China and India The growth will occur primarily in staff numbers as opposed to totally new 92 Au china-embassy org eng jmhzlt4622 l htm 51 FOR OFFICIAL t1SE 9 Nl Y FOR OFF1CDtL USE ONLY sites By the end of 2007 China and India will account for 31 percent of global R D staff up from 19 percent in 2004 93 Mere growth in sites does not tell the whole story however Examination of the adjustment in R D footprint revealed that different factors caused growth in different areas In China a low-cost skill base is coupled with companies' need for market and customer access This suggests that companies are focusing less on large innovation gains in China than in India or Eastern Europe where other factors dominated Overall foreign sites were found to be more likely to focus on specific areas of expertise within the development process They also were much more likely to focus on customizing products for local markets Indeed the primary reason that companies cited for opening or increasing the size of new sites in China was to be closer to their customers 94 The China Commission found that the sophistication of the technology developed and produced by China is increasing at an unexpectedly rapid pace China has been able to leapfrog in its technology development using technology and know-how obtained from foreign enterprises in ways other developing nations have not been able to replicate This rapid advancement is evident in the level of technologies that make up China's fast-growing trade surplus with the United States in Advanced Technology Products which increased by 72 percent from 2003 to reach $36 billion in 2004 95 The Commission found that China's approach to this development includes aggressive use of industrial espionage 96 It also noted that China is making significant progress in developing indigenous firms that have global brand recognition reputations for producing quality products and leading-edge R D programs China's growth strategy also involves developing different technology standards which may act as a significant market access barrier to products made outside China 97 93 Booz Allen Hamilton and INSEAD Innovation Is Global the Way Forward 2006 3-4 http www boozallen com media file Innovation Is Global The Way Forward v2 pdf 94 Ibid at 6 9 95 China Commission supra 86 96 Ibid 87 The Commission noted that as a result U S companies are taking some precautions with respect to their China operations For example it said Intel has not built a fabrication plant in China because it feared that it would lead to a transfer of proprietary infonnation on its chip designs and also on the design and management of its manufacturing process Id citing Fred Vogelstein How Intel Got Inside Fortune October 4 2004 127 97 China Commission supra 90 52 As another commentator stated Chinese leaders view science and technology as a kind of warfare China's progress on the technology front is seen as intimately connected to the global strategic balance 98 Assessing the actual level of technological development in China is difficult and subject to dispute The China Commission noted that neither current National Intelligence Estimates on China nor the DoD's annual report to Congress on China's military power contain an assessment of China's technological development 99 The National Science Foundation NSF measures such development through various indicators such as the number of patents granted the amount of funds U S parent companies invest in R D affiliates in China domestic gross expenditures for R D the number of science and engineering degrees issued and the percentage of high-tech exports Using these factors NSF concludes that with the exception of the science and engineering degrees indicator China's technological development is low relative to that of Malaysia Taiwan and South Korea However the rate of growth for these indicators in recent years is prompting the NSF to update its data on China By contrast others have noted that U S government assessments of China have traditionally been based on a belief that China's development lags far behind that of the United States While China has made highlevel breakthroughs in nanotechnology computer chip and semiconductor design satellites and supercomputing the U S government does not currently produce an assessment of the implications of these advancements for China's technological development as a whole or their application specifically to China's military advancement Researchers from The RAND Corporation and the Atlantic Council of the United States also argued that the NSF indicators do not capture the breadth and depth of China's technological development Michael Pillsbury pointed out that the Korean government's assessment of China's technological development places it only 2 1 years behind Korea and 7 0 years behind the United States rno Academic R D has seen robust growth in many countries as governments try to stimulate basic research capability and to connect universities with industry for the efficient exploitation of research results Figure A-13 The United States and the EU-25 including10 new 98 Evan Feigenbaum China's Technowarriors Stanford University Press 2003 l China Commission supra 96 100 Id citing Michael Pillsbury's Commission-sponsored research and RAND report 99 53 FOR OFFICiAL USE ONLY - FOR OF11CIAL YSE ONLY 0-18 Academic R D as share of total R D by country economy Most recent year IUe9n Fedtlatlon 2009I CJ i I I Ka 2009I I -- 2002 I I I OIN 2002 T _ 2002 I I I I I i I United Sia I Oernwly 2009I I Tot I OEOD 2002 I I I I F _ 2002 I I I I I ' I I I I I I' Unh9d Khgdom 2002 I I 2002 I ltlly 2001 I I I CMllda C200S I 10 0 20 p__ 30 OEOD b E-WC0-open1tio11 Md O Wllc1pmoll 80URCE OECO AMI _- ' lrdoltcn v9loU9 Figure A-13 Academic R D as a Share ofTotal R D by Country Economy member countries have been spending similar amounts for academic R D $41 to $44 billion in 2003 about double their expenditures in 1990 OECD nations other than the United States spent $74 billion an increase of 120 percent over 1990 Spending on academic R D remains less prominent in Asia China has experienced the most rapid growth in its spending for academic R D from $1 1billionin1991 to $7 3 billion in 2002 with double-digit growth rates since 1999 Nevertheless the academic sector where basic research is conducted in many countries plays a relatively small role about 10 percent in China's R D system This is also the case in some other Asian countries where R D tends to focus more on applied research and especially on development In other major OECD nations the share of academic R D was at least 14 percent 54 FOR OFFICIAL tl'SE 0Nl Y APPENDIX 8 THE EDUCA770N OF 5CIEN77STS AND ENGINEERS IS MOVING EAsTWARD Like the industrial sector the education sector is becoming increasingly globalized Over the past three decades the number of students leaving home each year to study abroad has grown at an annual rate of 3 9 percent from 800 000in1975 to 2 5 million in 2004 Today foreign students earn 30 percent of the doctoral degrees awarded in the United States and 38 percent of those in the United Kingdom In the United States 20 percent of newly hired professors in science and engineering S E are foreign born In China the vast majority of newly hired faculty at the top research universities received their graduate education abroad 101 International degree production is rising and is focused on S E The number of first university degrees awarded around the world is rising rapidly from about 6 4 million in 1997 to 8 7 million in 2002 Particularly strong increases occurred in Asia and Europe with large numbers and strong gains in engineering and the natural sciences In 2002 the number of engineering degrees awarded in Asia was more than four times the number of those awarded in North America and the number of natural science degrees was nearly double Europe graduated three times as many engineers as North America in 2002 Figure B-1 The share of S E degrees among first university degrees in the United States is lower than in other countries as is the share of U 5 degrees in natural sciences and engineering NS E - S E degrees not including the social sciences and psychology Just under one-third of all first U S degrees are awarded in S E This statistic has held fairly steady over the years as has the 19 percent share of NS E degrees 102 101 Richard Levin Universities Branch Out From Their Student Bodies to Their Research Practices Universities Are Becoming More Global _Newsweek August 21 2006 issue 102 National Science Board supra 0-12 55 FOR OF ONLY FOR OFFICttL t JSE QNJ y Flguv0-22 First unlv rslty d8D' 1JV region 1087 and 2002 0 - 1 800 - - - - - - - - - - - - - - - 1 AOO - - - - - - - -- - - - - - ---- o 1 200 1 000 800 200 0 191172002 1 72002 Norfl Amlricll M1e 191172002 1Q87 2002 1Q872002 Europe Nticll Cenhll Amerlc 80URCEB Oigm llmlan far Econcmll Co-opmnMon mid Do 111lapnient Cfto tor Educlitlon net '-lion ---- lltlp fhwww1 EDU_ 11cet 111p llnlW tcrw 8cllnltlll and Culur i UMESOO lnettkM tar etatletlca epec ill labulatona -1 ncan NMwofk o# 6ci r-end Tectlnology lndiclltcn flCYT inclpllu lnclc9dorwe de Clenclil y T cndogla 1 net COl W'IWy- appendix 2-37 Sdlnoe o El _ lnabtor aooe Figure B-1 First University Degrees by Region 1997 and 2002 When considering all levels of degrees however world trends seem to be moving in the same direction Figure B-2 In 1997 an average of 44 percent of all degrees awarded in other countries were in S E That number fell to 38 percent in 2002 Similarly the share of NS E degrees in countries other than the United States declined from 30 percent to 27 percent This indicates that the worldwide expansion of higher education degrees was stronger in the non-S E fields than in S E In light of these statistics OECD ministers have expressed concern that young people lack interest in S E 103 103 Id 56 FOR OFFICIAL tiSS ONT y_ FOR OFF'ICIAL USE ONl Y Flgll'8 0-23 Am university decJ ees In NS E as share of total first Ullverslty degrees 1997 and 2002 PW'C9llt -- 1G97 0 2002 lkllted et- Rlet of WDl'ld N85E onftlrll end 80UACE8 a -HaloMI c nw for 8c lence end tor Dwllopnent liltlullltlanl 0 - - i t of Minletry ol Educeton Cutv end 6denc Mcnbuetlo 6urwy o1 Ect lctitlon Mr11111 i e 2005 8out'I n' '1 tor Economic ' end 0 11Wlcpment Cento tor Eduolitlon end lnno tkln Educaton dlltllbeff ho t'-1 oecd org ec rlptW' EDl J_IJOEAuflenticllte -p T _ Minletry ol E Educetion818tlllillce ti Rlpubllc ol Ctn - null_ - OenMny -F _18 i tical Olb en Hocheddln 2003 enr11al MriM 20CM Unlttd Khgdom -Higher Ed lctition 8tllti9tice y tlb lr trone end lktl9d 818-u e o p tlneut of Ect lctitlon Nll tlaW c ntw for Education 8t61ic8 ln lilld Pwtwond11y Education De ComplMialie end Hatton I FGLrtdalon Dlrillan of 8clmlCe - - 8bitilltlce WlbC h fhllell o rwl 4JIN 8M 1llble 2-38 c Figure B-2 First University Degrees in S E as Share of Total 1997-2002 The education of young people in NS E has become increasingly important for many governments as they try to build more knowledgeintensive economies Regardless of the percentages of degrees in S E as is clear from Figure B-2 Europe and Asia have made great strides in increasing the number of NS E degrees awarded Although the percentage of college age students obtaining first university degrees in NS E vary significantly from about 16 per 100 24-year-olds in Taiwan to 12-13 in Australia and South Korea and 10 in the United Kingdom The United States with just under 6per100 ranks 32nd out of the 90 countries for which such data are available China and India have low ratios 1 6 and 1 0 respectively due to low overall rates of access to higher education in those countries But China is strongly trending 57 FOR OP'li'ICIM lJ5E ONI Y FOR OFFICIAL USE ONLY upward as S E degree production in China doubled and engineering degrees tripled over the past two decades 104 The number of S E doctorates internationally has also increased Figure B-3 In recent years most S E doctorates 78 percent in 2002 were granted outside the United States Approximately one-third of the new S E doctorate holders and one-third of those with doctorates in the natural sciences graduated from EU institutions At least another third of the engineering doctorates were awarded in Asia where numbers are likely understated because of incomplete reporting In 2002 the United States produced only 15 percent of the world's engineering doctorates in 2002 Even then students on temporary visas earned more than half of these degrees 1os Flglft 2-34 Natural sciences and 1111gln tng cloelontl degrees by olected cOlriry 1183-2003 - - --- 20 15 ----' -Ch ------ K- 01 L-'--'-'- --'--'--'-'- --'--'--'-'- __ _ _ _ __ 1888 191115 1 7 - 18111 1G88 1805 1987 1M 200 2009 NOlE _ _ _ - V _ ' '- lllologal - - - - i - --- 80URCE6 Ql--OonWlor--- e -- - ' - -- -o GBPDO l- - z ----2 Z --- 9clwyol-- E- -- _ -Or -- hllp f 2 -- -2008 Figure B-3 NS E Doctoral Degrees by Selected Country 1983-2003 104 105 ld Ibid 0-12 13 58 FOR OFFICIAL USE ONLJPY The 1990s also showed strong increases in the number of foreign-born individuals holding U S S E jobs By 2000 this share had increased from 14 percent to 22 percent Figure B-4 The largest increases were for doctorate holders from 24 percent to 38 percent More than half of the engineers in such jobs who held doctorates and 45 percent of the workers in the physical sciences computer sciences and life sciences who held doctorates were foreign born One-third of the foreign-born scientists and engineers working in the United States came from India China and the Philippines China and India alone comprised one-third of the total of foreign-born doctorate holders working here 106 Agtwe0-29 Shant or tcrelgn-bom scientists and englnHrs In U S S E occupations by decJ H level 1900 and 2000 P-t 40 30 - - - - - - - - - - - - -- -- - - -- - -- - - - NmE 0 -' pc CD01ptlwtODClllt- c1 1mr- -beca- alo na 80URCE U 8 0 Bin I PUblo-UM Mlcrodltli a np19 - - w- 8' '- end Sy'iwov lndlceill n 200ll Figure 8-4 Share of Foreign-Born Scientists and Engineers in U S S E Occupations 1999-2000 Foreign students earned one-third of U S S E doctorates and 55 percent of engineering doctorates while S E doctorates earned by U S white males dropped sharply The production of U S S E doctorates since 1990 rose from 23 800 to a record 28 800in1998 before dropping to 26 900 in 2003 The overall number was strongly driven by the number of foreign students Each year between 6 800 and 8 700 doctorates were 106 Ibid 0-14 59 FOR OFFICIAL tJSH 9Nl Y F'OR OFFICl AL USE ONLY awarded to students holding temporary visas-in 2003 these students earned one-third of the total number of doctorates more than half of the engineering doctorates 44 percent of the mathematics and computer science doctorates and 35 percent of the physical sciences doctorates 107 Despite some post-September 11 impact on foreign students obtaining visas many foreign students continue to pursue advanced study in S E fields at U S universities Moreover many of these then elect to stay in the United States to work or continue their studies after they complete their initial degree programs Each year since the mid-1990s between 6 500 and 7 000 foreign students who earned a U S S E doctorateapproximately two-thirds of the total-planned to stay in the United States after receiving their degree Many of these students remained in the country for years after graduation 53 percent of the 1993 foreign students who received doctorates were working in the United States in 1997 and 61 percent of the 1998 cohort were still in the country in 2003 However increasing international competition for these students raises questions about whether these historic patterns will continue 108 Of particular note the Asian nations that have been the source of twothirds of foreign doctoral candidates in the United States are now developing their own S T infrastructures that require these highly trained individuals to run them About 20 percent of foreign doctoral candidates in the United States came from China and 10 percent-11 percent each from Taiwan India and South Korea As these same Asian nations invest heavily in the development of knowledge-based economies and higher education systems they are starting to attract large numbers of foreign-trained Asian scientists and engineers Thus there is no assurance of a continued influx of students from this region to the United States especially since other countries are creating immigrant-friendly policies for those with advanced S E degrees 109 Changes in United States visa policies after September 11 2001 affected the flow of foreign-born scientists and engineers into the United States The number of high-skill-related visas issued annually to students exchange visitors and others grew rapidly during the 1990s but decreased sharply after September 11 Foreign student visas are now 107 Ibid 0-15 16 Ibid 0-16 17 109 Ibid p 0-16 108 60 FOR OFFICIAL USE ONI Y FOR OFFICIAL USE ONLY recovering but remain down by one-fifth since 2001 while other highskill visa categories are showing upward trends no Although these trends and figures may be alarming some recent studies have looked behind the raw data to provide more context to these figures A central factor in the studies warning about threats to the technological superiority of the United States has always been the fewer numbers of engineers the United States is graduating compared to China and India Figure B-5 Figures for 2004 generally report that the United States graduated approximately 70 000 undergraduate engineers in comparison to China's 600 000 and India's 350 000 Figure B-6 A study at Duke University however found that these figures were misleading because the Chinese and Indian figures included three-year training programs and diploma holders as well as four-year degrees 111 Moreover in addition to traditional engineering disciplines these figures include information technology specialists and technicians 112 Even more incongruous is that due to definition issues the Chinese figures may well include the equivalent of motor mechanics and industrial technicians 113 When the Duke researchers attempted to normalize the data across types of degrees the data revealed that the differences although still significant were not as dramatic as the initial figures Then when relative populations were considered the U S figures were comparatively superior to both China and India Ibid p 0-17 Duke University Master of Engineering Management Program Framing the Engineering Outsourcing Debate Placing the United States on a Level Playing Field With China and India Durham NC Duke University School of Engineering December 2005 2 http memp pratt duke edu downloads duke outsourcing 2005 pdf 112 Ibid 3 113 Ibid 7 llO 111 61 FOR OFFICIAL USE ONLY FOR OFFICIAL USE ONLJPY Graph 1 Engineering Computer Science and Information Technology Degrees Awarded In 2004 Engineering CS and IT Degrees Awarded In 2004 700 000 -r------------------- 600 000 - - - - - - - - - - - - - - - ' 500 000 - - - - - - - - - - - - - - - - 400 000 - - - - - - - - - - - - - - - - 300 000 200 000 100 000 0 -______ _________ --- --- _ _ __ _ ___ _ United States China India Country loNumber of Bachelors Oegreea oNumber of Subbacc111ureate DegreH I Note ShadeO a la dala mav consll1ule an overestlrnale Figure B-5 Engineering Computer Science and Infonnation Technology Degrees 2004 Graph 2 The Number of Bachelor's and Subbaccalaureate Degrees In Engineering CS and IT Awarded Annually per Mllllon Citizens 800 700 i J eoo uc i 500 i 400 i 300 II I 'I 488 S 200 271 t 1 9 100 Chine India United Stites Country Bachelors o Subbaccalaureate I Figure B-6 Bachelor's and Subbaccalaureat e Degrees in Engineering CS and IT Awarded Annually per Million Citizens The Duke study also looked behind the figures to consider the qualitative aspects of the individuals and their education The study differentiated between transactional engineers who are lower paid and 62 FOR OFFICIAL tfSE QW FOR OFFICIAL USE ONI y do routine work and dynamic engineers who possess higher technical skills as well as strong interpersonal skills and the ability to communicate across borders The study concluded that the real threat to the United States' science and technology economy exists in a subset of the engineering populations produced by China and India Foreign dynamic engineers trained by accredited universities with high language proficiencies and close proximity to their country's industrial and commercial centers are the most likely to compete with U 5 -based engineers for offshore engineering jobs and they also will be central to innovation drives in their domestic economies 114 A study conducted by McKinsey Co concluded that less than 10 percent of Chinese job candidates overall would be suitable for work in a foreign company Looking at engineers in particular the study found that Chinese applicants for engineering jobs suffered because the Chinese educational system teaches theory instead of application By contrast engineering graduates in North America or Europe work in teams on practical problems As a result McKinsey estimated that China's pool of young engineers suitable for work in multinationals is just 160 000-no larger than the United Kingdom's 115 In addition the study found that available graduates were so dispersed across universities and colleges as well as cities that as much as half of the total graduate pool is not easily accessible to employers Less than one-third of the 2003 graduates studied in the top ten university towns Only one-quarter live in a city or region close to a major international airport-a requirement of most multinational companies Finally only one-third move to a different province for work 116 McKinsey predicts that China will in fact experience a shortage of suitable labor in the near future Examining employment demands by large foreign-owned companies and joint ventures that do business in China McKinsey estimated that these companies will employ almost 70 percent of China's suitable graduates before demand from smaller multinationals or Chinese companies is considered In fact in 2003 unemployment rates among China's university graduates was just 1 percent The study predicted that over the next 10 to 15 years Chinese 114 Ibid 9 McKinsey Global Institute Addressing China's Looming Talent Shortage October 2005 5-6 http www mckinsey com mgi publications Chinatalent asp 116 Ibid 7 115 63 FOR OFFICIAL USE ONI y_ FOR OFFICIXL l JSI ONLX companies may need as many as 75 000 leaders who can work effectively in global environments Today they have only 3 000 to 5 000 such employees 117 Similar trends are evident in India McKinsey estimated India's supply of young professionals to be 14million 1 5 times that of China and almost twice that of the United States But again multinationals would only hire 10-25 percent of the 2 5 million graduates each year with approximately 25 percent of engineering graduates falling into in the hirable group McIGnsey attributes this to the great disparity in the quality of Indian universities Moreover the best graduates from the top schools often emigrate 118 These labor issues that may act as a brake on China's and India's projected runaway growth may be reinforced by problems in their financial systems Both countries are pursuing growth strategies based on relatively free markets yet neither has the financial system it needs to sustain rapid and efficient growth in the years ahead 119 Notably both countries' financial systems are distorted by government efforts to achieve social aims In China the government is ensuring a continued flow of funding to its many large but highly inefficient state-owned enterprises so as to preserve jobs Wholly or partially state-owned companies account for 73 percent of bank loans even though private companies account for over half of China's gross domestic product A major outcome of these policies is China's large volume of nonperforming loans 120 In India government funding is directed toward the large budget deficit and the country's rural investment priorities Although India's private sector has a number of highly productive companies the Indian government requires banks to give lending priority to state-owned companies and designated sectors such as household enterprises and agriculture As a result only 43 percent of India's commercial credit goes to private companies and the financial system is less able to finance growth 121 Ibid 8-9 Diana Farrell Don't be Afraid ofOffshoring Business Week March 22 2006 119 McKinsey Global Institute A Tale of Two Financial Systems A Comparison of China and India September 2006 http mckinsey com mgi publications talefinsys asp 120 Ibid 6-1 121 Ibid 10-11 ll7 118 64 FOR ONLY FOR OFF'ICIAL l JSE ONJ y__ Although none of the above factors is sufficient to eliminate concerns about these countries' increasing competitiveness in S T they do suggest that the feared march to dominance will not lack significant challenges for these countries Moreover it may take longer for significant qualitative changes to occur than first imagined New approaches to conducting academic research across international borders may have a more fundamental impact on the near-term future International educational joint ventures are becoming more prevalent such as the Johns Hopkins-Nanjing program in Chinese and American studies the Duke-Goethe executive M B A program and the MITSingapore alliance that offers dual graduate degrees in various engineering fields 122 Another new trend is the outsourcing portions of a research program to facilities in another country In one such example a Chinese professor at Yale runs a research center focused on genetics of human disease at his alma mater Shanghai's Fudan University in collaboration with faculty from both schools The Shanghai Center has 95 employees and graduate students working in a large laboratory facility Yale faculty postdoctoral fellows and graduate students visit often and attend videoconference seminars with scientists from both campuses The Yale-based laboratory has increased its productivity thanks to the lower costs of conducting some of its research in China At the same time Chinese graduate students postdoctoral fellows and faculty receive on-the-job training from a world class scientist and his U S team 123 These international programs will hasten the virtual elimination of borders for knowledge transfers They also will level the playing field for countries to entice their talented foreign-educated citizens back home Moreover countries such as China are working hard on elevating the world status of their top universities to encourage talented students to train at home These factors may significantly alter past patterns of migration and have a significant impact on the availability of trained S E personnel in the United States 122 123 Levin supra Id 65 FOR OFFICIAL USE ONLY --- FOR OFFICIAL tJSE ONLY APPENDIX C DISRUP77VE NNOVA770NS Certain innovations have the potential to fundamentally alter the way the Intelligence Community and its partners operate around the globe These innovations will have broad implications for everything from accelerating knowledge transfer to affecting the ability to operate in secret to altering the balances of economic and political power To build a strategy to deal with these innovations the Intelligence Community must understand the U S position in each of these fields and how these impacts may play out A study by RAND for the National Intelligence Council attempted to address the feasibility of many of these innovations Table 1 lays out the conclusions The letter G in parenthesis after the item indicates that these items are expected to have a global impact 66 FOR OFFICIAL USE ONLY FOR OFFICiAL USE 9NLY Table C-1 Technical and Implementation Feasibility of Illustrative 2020 Technology Applications Tablt S l Ttthakal and lmpltmfntation fHsibility ofmustratin 20 0 Tttllnolosy Appliution - NiclN mo1rtcet onfr Highly ible -- -- - - J - --- o GM Arwna1s for R D 2 M o UllCCflftf1tianal Trampon 5 M o Commlrc oll UAVs 11 M o HVl-Tech Terrorism 3 M o Nal KMd'lllCllCglH 2 G o Mibry Rabat ic a 2 G Untilrely - - -- NOTE J Jo o Ubiquitous RFIO Tagging 4 G o Cheap Solar 11-e gy 1O M o Drug O veloprr t frcm Sc r iing 2 M o FhlB illld Cm ysis 7 _Mj Manubct J ng 1e r 11 o Monilcwilg and Con1rol far DtSHH Manageme-nt M o Smart Systems I I I oTissue Enaineerina 4 M'1 o ' o for Tl'KD g ollld ID 3 M 1 Ml o Bioml4rics n sale ID 3 M o CSRN Sensor NtlWarlt in Cities 4 M o Enhanced Meooc r R -y 3 M o llml nllherapy 2 Ml o Tl'Nl Mnts tern Om Analysis o Gene Thlr lpy 2 G o GM lnHds 5 M o HospUI Rabobcs 2 M 2 M o Smart Tutiles 14 M o Chip Implants for Bniin 4 M o Drugs Tailcnd ID G9ne1ics 2 M 3 M o Quanun Compums 3 M o G9nltc Selection al Oftspring 2 M o Mificioll MulCti and TIS- 2 M Hd1 tre C'lltu J inlcrmill0t1 m calff ne nL 111 er au ct '2 iaCltal iea J i 1111- r foed lancl o Improved OiagnoAc and SurgiQI Methoos 2 G o Quanun Ctypllograptly 2 G o Eleelronoc Tninuc Ulns 2 G o Hands-he lmilrfitce 2 G o ln -o dNg R D 2 G o R Texliift 2 G o SKureDmTransfw 2 M o Sea6e Video MonolDring 3 M o We ntM Computers 5 M o ni nipin bas cl an Stem Cell R O 5 M o u mory Enholncng Drugs 3 M o Robatic Scienbt 1 M SoldieR 2 M or o 1nmmtt lb' purposes at I 7 G o R3pid 8-uys 4 G o RIAi Wnleu Comms 7 G o Ubiquitous lnlarma1icn Atcess Uf s Hiahlv Untilrely o Tqllld Drug OelWy 5 M o G n1bc SaMning 2 G o CBRN Sensors an ERT 2 G o GM Ctop5 8 M j o U S tiat u o trong nHd lo o 1o llYtbt ond iHa no aignificant pvbllc policy iuuN o Hybrid V9hlciH 2 G Un-uin - o Peivasiw 5-nSOB 4 G FH5ible So1fioliN o1 atn ng n ct 1W o1 m lium malbt and l'itiaea no algnificant public policy IAuu Mo1y u fY o nHd foro medium o molffret but - _ aigniffco1nt public policy iaauu li1110'1 o Chop Ausonomous Housing e G o Prim-to-On ler-8ooks 2 G o Hydrooln Vehicles 2 G o 1 ilnot soo a lil Uctin nemi Richard Silberglitt et al The Global Technology Revolution 2020 In-Depth Analyses RAND 2006 p xix 67 F6R OFFICl l USE O NLY FOR OFFICtAL lJSF ONLY C 1 NANOTECHNOLOGY The National Nanotechnology Initiative NNI defines nanotechnology as encompassing science engineering and technology related to the understanding and control of matter at the length scale of approximately 1to100 nanometers However nanotechnology is not merely working with matter at the nanoscale but also research and development of materials devices and systems that have novel properties and functions due to their nanoscale dimension or components 124 But the NNI distinguishes nanotechnology R D from other research that may have achieved a certain level of miniaturization or that operates at a nanometer-length scale This can create certain confusions where nanoscale research intersects with biology 125 ' Nanotechnology' touches upon a broad array of disciplines including chemistry biology physics computational science and engineering Like information technology nanotechnology has the potential to a virtually every industry from aerospace and energy to healthcare and agriculture 126 The United States made a commitment to nanotechnology in 2000 with the establishment of the NNI By 2005 funding for the NNI reached over $1 billion providing support to 11 agencies Forty centers and networks have been funded or are in the planning stages In 2005 worldwide spending for nanotechnology across all sectors totaled $9 5 billion up 10 percent from 2004 Figure C-1 Virtually every country that provides financial support for science and technology R D has a nanotechnology initiative 124 12s 126 PCAST supra 7 Id Ibid 5 68 FOR OFFICl t L USE ONLY FOR OFFICIAL USE ONLY GLOBAL NANOTECH INVESTMENT IN 2005 US$ million Governmert funding 4 610 Corporate R D spending 4 356 Source Nature September 14 2006 Based on Lux Research Figure C-1 Global Nanotechnology Funding 2005 $billions Of the $4 6 billion spent by governments on nanotechnology R D in 2004 the United States led in absolute terms with second-place Japan spending not even two-thirds as much as the United States Figure C-2 4-2 Govemment nanotech bldin 2004 $ mllllons U S _ _ _ _ _ _ _ ___ $1 593 Japan EU EU leveO Germany SocitiKorea France U K an Taann Olllers Figure C-2 Government Nanotechnology Funding 2004 $millions It should be noted however that approximately $432 million of the U S amount shown in Figure C-2 was at the state level and went for initial purchases of equipment and construction of facilities not to fund 69 FOR OFFICIAL tTSE QNI y_ ongoing research Thus the state spending is more likely to consist of one-time capital expenditure than to represent sustained spending 127 Removing these one-time expenditures would bring Japan's spending much closer to the U S figure One example of state-level initiative is the Albany NanoTech which is home to five R D centers and the College of Nanoscale Sciences and Engineering at the State University of New York Albany Albany NanoTech alone has attracted over $1 billion in private investment and has formed over 100 partnerships with other universities federal laboratories and industry These programs have led to close relationships with major electronics firms such as IBM ASML Tokyo Electron and International Sematech 128 Because roughly two-thirds of the federal NNI funding flows to university researchers 129 these state initiatives may not represent additional significant spending beyond the federal figures Thus although these state programs may have a significant impact on the future of nanotechnology in the United States that impact is not easily captured in traditional government industry spending measures Table C-2 shows some additional examples of statelevel activities 127 Nordan supra Floyd Kvamme Partner Kleiner Perkins Caufield and Byers Co-Chair President's Council of Advisors on Science and Technology Policy testimony before the House Committee on Science Subcommittee on Research June 29 2005 129 Lane and Kalil supra 128 70 FOR OFFICIAL USE ONI Y FOR OFFICIAL USE ONLY Table C-2 Nanotechnology R D Infrastructure Investments at State Level lllble 2 - H -hoiow R D laffilwuetll law str lffts at SUte 1 ewl - AZ - -- r 111crni - ' t Pl I I - -d _ RlcNMtefd Ol Wlro --- GA Rillfmt 0 llGeolale Tlld'I _ _ L c alR a Naltllo- ii 01 __ u u af L IN NJ 1'01111 ' 'dl W ' Ill ll IPl I oNJ GrT_ OllCll04 1Ce _ IS _ _______ 11111 - 0iict '811' ' Jldillal U Mnl OK NlniNal liPSCaR OR OMAMl - NllN Mllrll PA Nlidadoii 'UJ c w so ID - - - --- - -- AelMm '--- ian lw lflli tMldllg -- -Vt lftlltMllllN Ml _ _ -d'ifll w - _____ _ _ _ ___ _ _ ____ __ '-- - __ _ _ VA vallOut rl WlllHngtan Tlld'I 0 - Cllln _ Ulleoli -hlftnltip Other estimates of spending by various national governments include those shown in Table C-3 and Figure C-3 It should be noted that the data may suffer from significant definitional issues and lack of access to accurate government spending figures from some countries This may prevent true apples to apples comparisons However the trends incontrovertibly show significant increases in spending by all nations particularly since 2000 71 FOR OFFICIAL tJSE ONl Y FOR OFFICIAL USE 6NLJPYTable C-3 Estimated Government Nanotechnology R D Investments 1997- 2004 $millions Table 1 a o - fStilUted 'owwnment Nanoteclmologr l D ln'l'l ttmenu in 1H7-2004 S Miliou Bl 1 U 8 1ll0 _ - 111 111 tis 1$7 1o JH N ti ll9'il f D 44Gl 11$'1 1J't iDD ' - ra 2111 416 ' o3111 as tm SI SIMI 3194 am -11111 UllO o olillO oIMO -llCIJ -llU oUXID lllm llCD -a _ o ' -llD o -- llM 'o 1 011 0'20 1 Fig-1 GIVtrl- NamoMdl HD IllrH-o tn 19f7-ZOO o-'- --' lHl' 11111 llN IOIXI ll01 IOOI aollt - Mii - Figure C-3 Government Nanotechnology R D Investments 1997-2004 In reality however U S government spending is not keeping up with opportunities When examining these trends it should be noted that the current administration's FY 2006 budget proposed a decrease in funding from the level of support provided by Congress in FY 2005 130 The 2007 budget request is also less than the estimated 2006 spending Thus the U S figures over the next few years may show a reverse trend for U S spending while foreign spending is expected to continue to rise Researchers reported in 2005 that NSF received 48 proposals in its most recent solicitation for Nanoscale Science and Engineering Centers but could fund only 6 131 no Id 131 Lane and Kalil supra 72 FOR OFFICIAL USE ONLY FOR OFFICIAL t1SF i QN'J Y Just as is true of overall S T expenditures the private sector not government accounts for the majority of nanotechnology spending in the United States Figure C-4 The majority of corporate spending on nanotechnology R D worldwide also occurred in the United States Of the approximately 1 200 nanotech startups in 2004 half were in the United States A 2005 study identified approximately 600 companies in the United States or with significant U S operations that are engaged in nanotechnology R D manufacture sale and or use Notably 72 9 percent of these companies had been in business for less than 10 years 4-3 Corporate nanotech R D 2004 $ bilion1 $0 3 $1 7 C U S o Japan o EU coalllries o Other Figure C-4 Corporate Nanotechnology R D 2004 $ billions Venture capital investment in nanotech startups fell from $385 million in 2002 to $200 million in 2004 accounting for only 2 percent of nanotechnology funding in 2004 Venture capitalists who lost heavily in the Internet bubble may well be hesitant to commit more money until they can see substantial exits 132 The United States spends more on an absolute basis for nanotech research than any other country but it is falling behind Asian countries on a relative basis Figure C-5 Between 2001and2004 the U S share of global government spending has dropped although actual spending doubled from $465 million to $960 million The $130 million in estimated government spending on nanotech in China equaled $611 million when 132 Nordan supra 73 FOR OFFICIAL USE ONLY FOR OFFICIAL USE ONLY Figure C-5 U S Share of Global Government Investment adjusted for purchasing power parity 38 percent of U S expenditures This placed China second ahead of Japan and Germany When spending levels are adjusted for purchasing power parity the per capita spending in the United States is only fourth in the world 133 In addition some countries that the United States considers strategic threats such as Iran have nanotechnology programs Sean Murdock executive director of the NanoBusiness Alliance testified in June 2005 that the United States is currently leading the world in nanoscience but the lead is narrow and we face stiff and accelerating competition He further asserted that nanotechnology will be a game changing technology and is likely to be the engine of innovation for the next fifty years 134 At the same hearing Matthew Nordan of Lux Research Inc testified that while the United States leads the world in nanotechnology today its position is tenuous The President's Council of Advisors on Science and Technology reported in May 2005 that the trends in investment publications and patents all show a steady erosion in the United States' lead in nanotechnology Figure C-6 Id Sean Murdock executive director of the Nano Business Alliance testimony before the House Committee on Science Subcommittee on Research June 29 2005 133 134 74 FOR OFF1CIXL USE o n y FOR OFFICIAL USE ONLY Fig 5 The Dominant U S Position In Nanotechnolo Y Lies at Risk 5-1 Government nmotech fundlns 2 QO t per CllPb ft pwchnln1-poww S-rity 5-2 U S plDnta laued for c t on n8 0tube dllploy mppllcdon1 by counlry throup Februmy 2005 $9 40 Taiwan $6 30 $5 62 Japan S d Korea 20 Taiwan 12 U S $4 71 $4 33 nlllnd 22 Japan $5 42 U S Swttzarllnd Soulll Korea 12 Auslrta bl Franca t 11 Garmany $2 83 U K tu SiVll Ol'I $2 69 Garmany t ll Franca $2 62 Netherlands $2 53 Figure C-6 The Dominant U S Position in Nanotechnology Lies at Risk Moreover although other nations may not be spending as much as the U S overall they are choosing to concentrate their efforts in particular sectors to make significant advances in those sectors more quickly Table C-4 For example Korea and Taiwan are investing heavily in nanoelectronics while Singapore and China are focusing on nanobiotechnology and nanomaterials 135 135 Jim O'Connor Motorola testimony before the House Committee on Science Subcommittee on Research June 29 2005 75 FOR OFF1C121Cb YSE ONLY FOR OFFICIAL USE 6NU Table C-4 Focus Areas of Government Investments in Nanotechnology Table 3 focus Areas of Government Investmtnts tn Nanot8chnology 0 IMMll i lolnall Elldllric i 8aletW h5Nnell ElMvnmlrl ' ' x x GBPMllrl Educlllall I - - I x An1lil llllgia Cztdt _ c GBP - Fnia I K x K x x x x x ox co - I x 111111 x l lllllld I x 1 11111 1 x I JI x x K Dr8I I I l1lly x C x x x x x x x x x x x x x x x x x x I I x x I lle01ertlftdll x ol- t l x x ADrMM I Sollll'INIU I x r Llrllld Kllglbll x llmlldSlam K x x x x x x x K x x x lllltt o 1wll tlN lU IS lw il I llful 1 t'1111 IMirl lll lU mlllllill Me sllawtl lllfl lat -Ulflllll -111-m China is investing heavily in nanotechnology tluough the National 863 Hi-Tech R D Plan and has opened tluee nanotechnology centers and over 20 university institutes including the Shanghai Nanotech Promotion Center- a network of six nanotechnology R D centers at Shanghai universities In 2000 the Chinese Academy of Sciences CAS opened The Center for Nanotechnologies to unite over a dozen CAS institutes and several university laboratories 136 In 2004 it was reported that the Chinese central government had budgeted about $240 million for nanotech projects between 2003 and 2007 In addition at least as much had been 136 Alexandr Nemets China's Nanotech Revolution Association for Asian Research August 23 2004 www asianresearch org articles 2260 htrnl 76 FOR OFFICIAL USE ONLY FOR OF'FICIAL USE ONLY budgeted by local Chinese governments A year later the Chinese government announced that it was increasing its investment levels but did not specify by how much As of 2005 it was reported that China had 3 000 researchers engaged in nanotechnology related programs and over 800 companies working in the nanotechnology field According to reports from the Asian Technology Information Program ATIP China is especially strong in nanomaterials development China's nanomaterials focus its low cost of doing business its talented labor pool and its potentially large domestic market could provide incentive for further investment by foreign corporations seeking to capitalize on nanomaterials development 137 In November 2002 the CAS launched a joint project with a U S company Veeco Instruments Inc under which the CAS agreed to cooperate in running a nanometer technology center aimed at providing Chinese researchers access to Veeco-made nanotechnology instruments At the opening of the center Veeco President Don Kania predicted that China will gain the leadership position in nanotech 138 Although the impact of such investments is hard to quantify researchers highlight two developments in China's quest for nanotechnology leadership First Chinese researchers are now publishing more research papers on nanotechnology In fact according to The Scientist from January to August 2004 the latest figures available at the time of publication China produced 3 621 research papers on nanotechnology-more than any other country and 14 percent more than the United States This must be seen in context one source suggests that in terms of high impact publications the United States has stemmed its drop in share and still has over 50 percent of the annual high-impact publications Figure C-7 Other sources do not support the claim that China has overtaken the United States in publications at any level of impact Figure C-8 137 138 PCAST supra Nemets supra 77 FOR OFFICIAL USE ONL f FOR OFFICIAL USE ONLY Figure C-7 U S Share of Publications and High-Impact Publications Figure C-8 U S Lead in Publications Second China promulgated its first batch of standards related to nanotechnology and is currently seeking to develop a complete set of 78 FOR OFFICIAL USE ONLY FOR OFFICIAL USE ONL t standards to be adopted by the International Standards Organization and thus shape the future of nanotechnological development The United States Japan and some European countries are working on their own set of standards to try to create a competitive alternative framework for the future direction of nanotechnology Third some industry leaders express concern that China's lax enforcement of intellectual property rights makes competition with China difficult if not impossible Chinese manufacturers are stressing their ability to deliver products identical to those of U S and European companies at prices 15-20 percent lower Because they generally refuse to identify their production processes some suspect that they are using Western patent filings like recipe books 139 As the National Nanotechnology Advisory Panel noted in its May 2005 report While we all want the United States to benefit economically from nanotechnology as quickly as possible it is critically important that the basic intellectual property surrounding nanotechnology be generated in and reside within the United States Those who hold this knowledge will 'own' commercialization in the future 140 C 2 BIOTECHNOLOGY The development of biotechnology around the world is likely to be very uneven Table C-5 and Figure C-9 Some countries have opted for slower development because of concerns over ethical issues and environmental risks whereas others do not share the same concerns and are adopting biotechnology more rapidly For example while Asian countries appear poised to move toward use of genetically modified foods and organisms public sentiment and pending legislation are likely to pose a barrier to similar developments in the European Union 141 The impossibility of containing knowledge within country borders as a result of the increasing flow of information people and resources means that cautious countries cannot control the actions of less cautious countries and or entities The emergence of significant private-sector investment around the globe for research in the areas of stem cells and cloning exemplifies this dilemma 139 140 141 Nordan supra PCAST supra 3 Silberglitt et al supra 79 FOR OFFICIAL USE ONI Y - FOR OFFICIAL t JSE ONLY Table C-5 Growth in Global Biotechnology 2004-2005 Growth In globitf Iilotm hnoloe 2004-2005 c11 aeo 2005 2004 Altl6ic ampany dalt $11 A s 6i156 61367 R D o Pllfllll $'11 lltt loss I$11 20 415 4 388 1'1542 4 ' 6 270 - 30K NumlHr ccnJ alitJ Klbhc co11pan Priv 111o companies FUbl'ic and private companies -- - 67i 645 4% l 532 3 522 4 167 0 3% 4 203 --- ' ta 1% _ _ 120lll Dt 11 JOGl5 _ _ _ __ UQ Dt 11 200' io oo Biotechnology R D lJrl90 5iilll i o Genl'any 12110o1 _ i 7o I u I u 134l I 09llmlrl 1 I 1f a I I u KOU f4 l0 2110o1 - 2002 u 12llOol _I OWN SNf9111 IA ZJGI Zltllllld f4 l0 H _ u SQM IZlm _ NarWay l IOiJllCl ZJGI D 2 0DD o DDO 6 0IXI a ODO 10 Cllll 12 llCll 1 000 16 0IXI eo ' ---CDU--llla--IUOMCaUoIW_D_IOlbftrfMftnot of--IUC-IOD-IDV't l'or-ll TM lllOoIS-IDD lolr Figure C-9 Total Expenditure on Biotechnology R D by Active Firms 2003 $million ppp 80 FOR OFFICl l lJSF ONLr_ FOR OFFICIAL USE 6NLJPY APPENDIX D WORLDWIDE ACCESS TO INFORMATION IS ExPANDING RAPIDLY 0 1 BROADBAND USAGE The rapid expansion of broadband access is greatly extending the ability to collect and share information around the world in mere seconds As of the first quarter 2006 the United States still led in total number of broadband subscribers with over 48 million China was in second place with over 41 million and Japan was in third place with 23 million subscribers Figure D-1 Top 1O Broadband Countries by Subscribers 2005 2006 Source Point Topic 40 000 30 000 20 000 10 000 0 USA China Japan South Korea Genna ny UK Fran e ttaty 7 536 7 116 Canada Spain CI Q105 38 004 28 307 19 838 12 087 7 669 5 208 5 889 3 736 o 0106 G 311 41 196 23 701 12 459 11 449 10 833 10 821 7 394 7 105 5 322 42% 21% 42'Mi D Growth 27% 46% 191Hi 3% 52% 52% 41% Source Point Topic Figure D-1 Top 10 Broadband Counbies by Subscribers Ql 2005-Ql 2006 If the growth in the number of subscribers continues at its current rate China is expected to pass the United States sometime next year It should be noted however that this growth rate has slowed significantly in the past two quarters The growth rate from third quarter 2004 to third quarter 2005 was over 90 percent but the growth rate from first quarter 2005 to first quarter 2006 was only 46 percent It is uncertain whether this 81 FOR OFFICl U USE ONLY FOR OFFICIAL USE 6Nl Y _ slowing is due to saturation of the most easily wired locations government controls on Internet access in the country different sources of data or other unknown factors However one source the analyst company Ovum predicts continued growth at approximately 79 percent per year ff this prediction is accurate China would reach 79 million subscribers sometime in 2007142 and 139 million subscribers by 2010 The vast majority of current subscribers 71 percent according to Ovum use Digital Subscriber Line DSL access Another 26 percent use Ethernetbased LANs local area networks primarily in high-density areas There is little use of cable access even though China already has 128 million cable TV subscribers Despite these current figures however China still lags the United States significantly in household penetration with only 8 62 percent of households having Internet access While significantly higher than the Chinese percentage the relative position of the United States is dropping due to higher growth rates in Sweden Luxembourg and the United Kingdom South Korea still leads all countries with 83 percent broadband penetration followed by Hong Kong with 80 98 percent Iceland at 74 percent Israel at 69 08 percent and Taiwan at 64 65 percent Figure D-2 Broadband access via cellular mobile networks promises to increase the number of broadband subscribers Although second-generation 2G cellular mobile networks are able to provide data connectivity equivalent to slow dial-up links they are not sufficient to provide truly mobile broadband wireless access Third-generation 3G mobile networks and 2 5G enhancements for existing networks are adequate to provide packet-based communications that can reach broadband speeds of 200 kbps or better 143 High-speed downlink packet access HSPDA also known as 3 5G will require only incremental upgrading as opposed to replacement costs of other new technologies 144 142 One source suggests that the number of broadband users in China has already reached 77 million Sino Daily September 21 2006 It is unclear however whether subscribers and users are the same thing so no conclusion can be drawn about whether the data sources are comparable 143 Burton Group supra 5 144 CNET Asia April 24 2006 82 FOR OFFICIAL tfSE 6NLY FOR OF'FICIAL USE ONLY Top 20 Broadband Countries by household penetration 2005-2006 0 c CD J 0 Source Point Topic 90 80 I c 70 8 60 - 50 40 30 o Q CD cc m - I- 20 0 10 I 0 Ill Q c 0 c o it - r c 0 I Q E '5 0 en I- I- _ I- - I- I- -- 0 I 0 - c m m - o mc Q m Q c u s z m 411 c m c l x iii G cE 3 en 0 m u 411 0 c c l 2 m 0 c - I - c mc m 0 z en m h Q it E Q - ID - - n Q en 0 Cl _J Source Point Topic Figure 0-2 Top 20 Broadband Countries by Household Penetration Ql 2005 - Ql 2006 3G mobile data services are currently available in major metropolitan areas in Europe Asia and the United States The 3G technologiesEvolution-Data Only Revision 0 EV-DO Rev 0 for Code Division Multiple Access 2000 cdma2000 and Universal Mobile Telecommunications System UMI'S for Global System for Mobile Communications GSM carriers-provide downlink speeds equivalent to broadband i e 200 Kbps Several vendors including HewlettPackard Dell and Lenovo are embedding 3G technology into their laptops The next versions of 3G technologies- EV-DO Rev A and HSPDA-are likely to achieve widespread metropolitan coverage by the end of 2007 although uplink speeds are still fairly slow 30 Kbps to 60 Kbps Because voice revenues are declining companies are looking to data services to offset these lower earnings As a result they are 83 FOR OFFICblcb tJSE ON Y FOR OFFICIAL l JSE ONI Y motivated to invest heavily in their networks and improve the available services 145 Even newer technologies are expected to fuel the expansion of such access into increasingly remote areas One such technology WiMax also known as fourth-generation wireless or 4G is expected to provide broadband access in rural areas not currently served by hardwire access 146 WiMax comes in two versions the fixed broadband system already in place in Europe under IEEE standard 802 16d and the mobile version under IEEE standard 802 16e The fixed version currently requires users to put a small receiver dish on their roof and connect it to a modem This permits Internet access from antennas up to 10 kilometers away The latter version of WiMax will provide high-speed Internet access similar to current Wi-Fi technology but over broad areas similar to those covered by mobile telephone networks 147 Unlike current Wi-Fi which has a range of 100 meters 148 WiMax would function even when the user is many kilometers from a base station The goal is for users to use a laptop cell phone or other handheld gadget without needing a cable or Wi-Fi hotspot and be able to surf the Internet or download music and movies as if they were using the fastest traditional broadband access 149 W iMax will also link to the Internet everything from digital cameras and music-players to sensors to household appliances This will let people do things that are now technically difficult or prohibitively expensive such as mobile video-conferencing or managing a building's gon1ine 150 li ghtin This technology has received recent boosts with Sprint Nextel planning to spend $3 billion over the next two years to build a functioning U S network by 2008 Other key players in the development of the technology are Intel for chips Motorola for equipment and Samsung the South Korean electronics company for network infrastructure Some have suggested however that WiMax would face a significant cost challenge from 3 SG technology in locations that have already invested in 3G infrastructure In places where such technology is not already in place particularly rural India WiMax is expected to 145 Gartner Group Mobile Data Services So Many Choices July 2006 WiMax stands for Worldwide Interoperability for Microwave Access and is based on IEEE 802 l 6e 147 Surfing the Airwaves The Economist July 13 2006 148 New Scientist October 29 2005 149 Wireless Networking May Soon Get Faster Will Anyone Care The New York Times September 26 2006 www nytimes com 2006 09 26 business 26wireless html 150 Wireless Broadband The Economist August 10 2006 146 84 FOR OFFICIAL USE ONLY FOR OFFICIAL USE ONLJPY flourish 151 The 3 SG technology becomes especially attractive because at actual speeds WiMax offers little to no speed advantage for people with 3G smart phones or laptops with 3G modem cards that can be upgraded to 3 SG 152 Some have questioned whether 4G technology will succeed given the expense of building such wireless networks and the relative cheapness of fixed-line access But other countries are investing heavily notably Japan where the government has made leadership in 4G a national goal and is investing millions of dollars in research There are currently two competing 4G standards The Japanese company NTI DoCoMo is championing an alternative version of 4G to WiMax 153 Qualcomm and Ericsson are pursuing the same route as NTI DoCoMo Meanwhile Samsung has assembled a team of 170 engineers most with doctorates from top universities in the United States 154 and spent over $1 billion on research into the WiMax approach Samsung has already demonstrated a prototype that was used during a bus ride to show that the system worked over distance and while in motion 155 The cost tradeoff between this type of technology versus fixed line will also be significantly different in countries where fixed-line access is not yet widely available Thus the primary demand may come from countries where this technology will be the first to offer broadband access to remote areas rather than replacing existing technology One source has indicated that the IEEE 802 16 2004 version of WiMax is being adopted by carriers in developing countries as their primary means for providing broadband services by competitive carriers globally to penetrate new markets and by large incumbent carriers to extend their broadband networks into rural areas 156 A further effort that will push broadband access to more remote areas is the development of a windup laptop that will cost only $100 to manufacture This machine developed by MIT researchers will come with batteries that can be recharged using a crank thus avoiding the need for constant charging or connection to a power grid It will have a 500 151 CNET Asia April 24 2006 New Scientist October 29 2005 153 This alternative is based on IEEE 802 20 154 Wireless Networking May Soon Get Faster Will Anyone Care supra 155 Id 156 Broadband Strategies for the Fixed Market report abstract June l 2006 available at www marketresearch com map prod 1300373 html 152 85 FOR OFFICIAL USE ONLY FOR OFFICIAL USE ONLJPYmegahertz processor and only 1 gigabyte of memory but include built-in wireless networking A non-profit company formed by MIT to market the laptop hopes to build more than 100 million of these machines by 2007 They will not be sold commercially but only to governments in developing countries for distribution to their nation's children 157 D 2 CELLULAR TELEPHONES The significant increase in mobile phone penetration around the world parallels the rapid expansion of broadband and its supporting networks China currently has 430 million cell phone subscribers In August of this year this number increased by 5 19 million India has 123 million subscribers to date but has become the fastest-growing mobile market in the world having added a net 5 9 million subscribers in August alone The biggest impact of cell phone growth is being seen in countries where landlines were never installed in significant regions and where installing them would be prohibitively expensive 158 As of December 2005 more than 2 billion people had cell phones It is estimated that there will be 3 billion cell phone users worldwide by end of 2008 China alone is expected to reach the 600 million mark by 2009 Mobile phones are beginning to dominate over landlines In March 2006 64 percent of the phones in service in India were cell phones Of the new telephone subscriptions that month in India 94 percent were solely for mobile phones 159 In 2005 there were 1 26 billion land phone lines compared to the 2 14 billion cell phone subscribers worldwide Eighty percent of the people in the world currently live in an area with cell phone reception 160 As a result cell phone penetration figures continue to climb Table D1 As of 2005 68 percent of the people in the United States had a cell phone subscription Other countries had significantly higher figures 157 NewScientist com News Service supra Mobile Phone Proliferates A Hallmark of New India The New York Times September 15 2006 Section C p 4 159 Cell Phone Subscriptions Surge in India News com April 10 2006 available at http news com com Cell phone subscriptions surge in India 2110-103 7 3-6059482 html 160 Recycled Cellphones Help Drive Third World Wireless Boom USA Today August 20 2006 available at www usatoday com tech wireless phones 2006-08-20-cellphone-recycling x htm Statistics provided by International Telecommunications Union 158 86 FOR OFFICIAL USE ONLy_ FOR OFFICIAL USE ONLY Table D-1 Cell Phone Penetration CELL PHONE FACTS Cell phone subscribe o by country 2005 cell pho 'leS PBI 100 poopli o o o o o o o o o o o o o o o o o o Algeria 13 7 million 42 Algentina 22 1 million 57 Bangladesh 9 million 6 Britain 61 1 mHlion 102 Canada 16 6 milion 51 Chad 210 000 2 China 393 4 million 30 France 48 1 mmion 79 o Germany 79 2 million 96 Guatemala 3 2 million 25 India 76 million 7 Japan 94 7 million 7 4 o Kenya 4 6 million 13 Mexico 47 5 million 44 Russia 120 million 84 South Africa 31 million 65 United States 201 6 millon 68 World 2 14 bRlion 32 Soura L rJtumt-1t1onaf Tnlecnrrm1unrr at1on Union By 2006 30 countries had a penetration rate of over 100 percent Table D-2 It is expected that by the end of 2006 that number will have reached 40 87 FOR OFFICIAL USE ONLJPY FOR OFFICIAL USE ONio Y _ Table D-2 The 30 Countries With More Than One Cell Phone Per Person Penetration 0 o Mar-06 Turks Caicos Islands 161 8 Aruba 150 8 Luxembourg 140 7 Lithuania 139 9 Cayman Islands 136 4 Netherlands Antilles 134 0 Grenada 133 3 Israel 125 9 Italy 122 4 Cyprus 121 5 Macau 121 3 Bahrain 117 8 Greece 114 7 Czech Republic 114 0 UAE 113 9 Jersey 113 6 Sweden 112 5 Hong Kong 110 8 UK 110 1 Estonia 108 6 Spain 108 0 Austria 107 3 Ireland 107 0 Norway 106 1 Antigua Barbuda 104 6 Iceland 103 3 Finland 103 l Portugal 101 3 Kuwait 101 1 101 0 Singapore Source research firm Informa Telecoms Media Despite the rapidly changing nature of the cellular telephone industry R D spending by the telecommunications giants fell between 2000 and 2004 the latest year for which data were available In 2000 the top four R D spenders in the technology sector were telecommunications 88 FOR OFFICIAL tJSE ONlo Y - FOR OFHCl M USE ONLY companies Ericsson Lucent Motorola and Nortel together accounting for nearly $20 billion in R D spending By 2004 their combined spending had dropped to $9 billion Lucent parent company of Bell Labs fell from number 6 among the overall top 100 spenders in 2000 to number 71 in 2004 after cutting its R D spending five years in a row In 2004 Swedishbased Ericsson cut its R D spending 23 percent spending $873 million less than in the prior year That same year Motorola cut its spending by $711 million a nearly 19 percent decrease from the prior year The only top telecommunications company to hold its spending relatively steady was the Finnish company Nokia which cut its spending less than one percent As a result it was the only telecommunications company in the top four of the technology sector companies in 2004 161 The drop in spending by these companies is expected to continue at least through 2006 with Nortel expected to decrease its R D spending in 2006 by 17 percent from its 2005 levels Lucent Technologies was expected to decrease its 2006 spending by 6 percent from the previous year One notable exception is Tellabs which is expected to increase its spending by 12 percent from the previous year although it will still spend less than half of what Lucent spends this year 162 Despite the falling R D spending cell phones are becoming more complicated with more features Many of them are small computers that may include a larger color screen and a built-in camera They can send and receive text messages and serve as an alarm clock calendar game player music player or FM radio Some have satellite positioning functions or may be able to record and play video clips 1fil These new devices are at the intersection of three key industries communications devices computers and consumer electronics and are the best-selling devices in all three of these categories Some predict that increased processing power memory bandwidth and capacity mean that the total semiconductor memory content of all mobile devices sold yearly will equal that of personal computers by 2007 164 The way cell phones are being developed and manufactured has changed significantly Due to the variety of features colors sizes and shapes the number of models introduced in a year has risen from 4 or 5 per year to 20 to 30 models Although China has traditionally offered the 161 IEEE Spectrum R D 100 IEEE Spectrum December 2005 2006 R D Funding Improves Amid Increasing Restraints R D Magazine January 2006 163 Battling supra 164 Memory Technology in Mobile Devices-Status and Trends November 9 2005 162 89 lowest labor costs for phone production this has changed due to overall considerations Now equipment manufacturers are opening plants in India Brazil Mexico and Russia where proximity to the locations where the phones will be sold and used service and flexibility offsets labor costs 165 Traditionally a few vertically integrated companies such as Nokia Motorola and Ericsson dominated the industry since making mobile phones required expertise in a broad range of areas including the design of radio chips and software integration of electronic components and case styling Manufacturers had to be able to produce large quantities efficiently and promote products to consumers effectively They also needed to build the large and complex base stations used to provide coverage These requirements presented large barriers to entry that the usual low-cost electronics firms could not surmount 166 Those barriers have fallen in recent years resulting in a completely new industry structure Hardware and software have become commoditized Radio chips and the necessary software can be purchased off the shelf A number of small firms have sprung up that specialize in handset design chip design testing and or software Manufacturing can be outsourced to electronic-manufacturing services firms Some of these firms called original design manufacturers ODMs have begun to design as well as build handsets Most of the largest ODMs are Taiwan-based including BenQ Arima and Compal others are in China and South Korea They design and build the handsets for well-known companies that add their branding to the finished telephone and sell it as their own In fact the biggest ODM customers are the big-name companies such as Sony Ericsson a handset joint venture between Sony in Japan and Ericsson of Sweden Motorola Siemens Toshiba and Panasonic The new ODMs are disrupting the industry's previous order 167 The rise of ODMs has allowed traditional handset companies to fill product line gaps quickly and cheaply reduce R D spending and reduce risks from supply and demand swings Mitch Schoch Handset Manufacturing Not a Simple Endeavor Suiface Mount Technology 20 5 May 2006 29-30 166 Battling supra 161 Id 165 90 FOR OFFICIAL tJSH Q Nl Y FOR OF'F'ICf l L USE QNJ y _ Motorola and Sony Ericsson outsource 35 percent of their manufacturing and no longer design their own radio chips 168 The challenge for the largest companies particularly Nokia and Motorola is that they continue to plan to compete in every market worldwide Their smaller competitors however intend to cherry pick certain markets and product niches ODMs have already claimed 20 percent of the handset market in Taiwan and are targeting certain countries in central Europe 169 0 3 INTERNET STANDARDS Standards for Internet use are also undergoing change The next generation of the Internet Protocol 1Pv6 is gaining momentum in South Asia and will be supported in Windows Vista The new protocol will provide a greater supply of Internet addresses improved configuration capabilities mandatory support for IP security and quality of service and simpler merging of networks At a meeting of the Open Source Intelligence Forum in October 2006 Major General ret Dale Meyerrose chief information officer of the Office of the Director of National Intelligence ODNI stated that the DoD and ODNI published a joint strategy to move to Internet Protocol version 6 in June Additionally Defense modified a number of its contracts specifically those around netcentric services so ODNI could use them more easily 170 Although operators in Asia have been ordered to support 1Pv6 U S IT managers have not acted to adopt the standard Some have suggested that lack of expertise and deployment of 1Pv6 could hurt U S technical leadership in the Internet Further if international web sites cannot be accessed with IPv4 products this could cause problems for U S enterprises 171 Others argue however that organizations other than government agencies or contractors required to adopt IPv6 should defer deploying it They assert that arguments regarding 1Pv4 address space exhaustion and address inequity are grossly exaggerated They also claim that there is no evidence that IPv6 will enhance quality of service or network security compared to IPv4 services that have implemented IP security IPsec and Id Id 170 Jason Miller Intel IT Is Coming Together Washington Technology October 20 2006 171 IPv6 Still Gets No Respect in the United States Eweek com June 15 2006 16s 169 91 FOR OFFICIAL USE ONL ' FOR OFFICIAL USE ONLY diffserv They also dismiss the desirability of auto-assignment of addresses compared to Dynamic Host Configuration Protocol DHCP implementations particularly in Active Directory environments Finally they argue that elimination of Network Address Translation NAT is not necessarily desirable because NAT contributes to many network security solutions 172 172 Burton Group 1Pv6 Unmasked February 2006 92 FOR OFFICIAL USE ONLY FOR OFFICIAL USE ONL'f APPENDIXGBP ACRONYMS AND ABBREVIATIONS ARPA ATP Advanced Research Projects Agency Advanced Technology Panel CDMA Code Division Multiple Access CNGI China's Next-Generation Internet DARPA Defense Advanced Research Projects Agency DNI Director of National Intelligence DoD Department of Defense DSLAM Digital Subscriber Line Access Multiplexer EU European Union GSM Global System for Mobile Communications HUMINT human intelligence iARPA intelligence Advanced Research Projects Agency IC IEEE Intelligence Community Institute of Electrical and Electronics Engineers IPDSLAM Internet Protocol Digital Subscriber Line Access Multiplexer IPv Internet Protocol version ISB Intelligence Science Board IT information technology NGN next-generation network NIH National Institutes of Health NNI National Nanotechnology Initiative NS E natural sciences and engineering NSF National Science Foundation ODM original design manufacturer ODNI OECD Office of the Director of National Intelligence Organisation for Economic Cooperation and Development R D research and development S E science and engineering S T science and technology TD-SCDMA Time Division-Synchronous Code Division Multiple Access UMTS Universal Mobile Telecommunications System VoIP voice over Internet Protocol 93 FOR OFFICIAL This document is from the holdings of The National Security Archive Suite 701 Gelman Library The George Washington University 2130 H Street NW Washington D C 20037 Phone 202 994-7000 Fax 202 994-7005 nsarchiv@gwu edu