Although 2001 was a rough year for the information technology sector, President Bush’s tech-heavy defense budget could mean much better days for both industries.

While most economists agree that the information technology sector will take a little longer to get back on its feet than the bulk of other industries, many are betting that the increased defense budget will give it a boost. The U.S. Department of Defense has designated a hefty $10 billion dollars to be spent specifically on the research and development of new technologies – an amount equal to a quarter of Russia’s total budget. In October, the Senate approved a defense budget of $343 billion (10% more than last year), with about $51 billion allotted for R&D (a 13% increase). Furthermore, President Bush has recommended that 20% of the $51 billion be spent on new technology.

This is good news for the beleaguered IT sector, which economists have been predicting will lag behind an overall economic recovery expected in late 2002 and early 2003. It’s also good news for major tech centers, such as San Jose, CA, which have been hit hardest by the technology fallout. In a recent review, Secretary of Defense Donald Rumsfeld said that in allotting the R&D funds, the Department of Defense “will rely on the private sector to provide much of the leadership in developing new technologies.” Signaling a possible windfall is the fact that last year, more than half the money spent by one branch, the Defense Advanced Research Projects Agency (DARPA), went to private companies.

The predicted increase of government-funded R&D projects has drawn some comparisons to the last big state-funded push for new technology during the space race of the 1960s. The money the government spent on space program technology during these years – which amounted to nearly two-thirds of total R&D funding – led to the rapid development of satellite, biomedicine and semiconductor technologies. But experts are hesitant to make too many analogies between the 60s space race and current spending. For one thing, the war on terrorism places less of an emphasis on technology, due to the importance of the human factor in intelligence gathering. Government may never spend as much on R&D as it did during the space race. According to Loren Thompson, chief operating officer and military analyst at the Lexington Institute, “Chances are that 90 percent of technology-development funding that occurs in the United States will be in the commercial sector.” Thompson predicts that Defense will move away from procurement habits that he calls “the last refuge of socialist buying practices” and spread its spending over a wider array of commercial companies, rather than concentrating it on a traditional few. The military “needs the commercial sector,” says Thompson, “because only the commercial sector delivers technology quickly.”

High on the list of priority areas where spending is expected to occur is in the development of technologies to combat bio-terrorism and cyber-terrorism. With these needs identified as imperatives, the push to develop biosensors that detect pathogens with greater success and network security systems that offer greater protection against terrorist hackers may be what jumpstarts the next wave of technological innovation.

Source: Defense Spending May Be the Mother of All Invention
Stacy Lawrence
Red Herring, Jan. 14, 2002
http://www.redherring.com/investor/2002/0114/718.html