Just as surely as biotechnology can shape the growth of living cells, its awesome potential for engineering economic growth is being recognized by industrial nations around the world.

In barely a decade, biotechnology has moved from a test tube experiment to a high industrial priority of governments. Japan's Ministry of International Trade and Industry, which has guided development efforts in automobiles, silicon chips and computers, also has designated biotechnology a "strategic industry." Research and development support to Japanese firms has been boosted to more than $100 million, a 55 percent increase in little more than a year, according to the National Academy of Science.

West Germany, with three federally sponsored biotechnology research institutes, will join with its industry in investing an estimated $250 million in research next year. England, Holland and France also have increased their biotechnology research efforts significantly.

"It's absolutely a global market," says Dr. Howard Schneiderman, senior vice president for life science research at Monsanto Corp. -- a market that some experts believe will reach $100 billion in sales by the turn of the century.

Even within the Reagan administration, which has pressed to reduce federal involvement in the marketplace, there is a recognition that government research is an essential resource in international competition.

George Keyworth, the White House science advisor, and other members of a presidential task force, have called for a cabinet-level Department of Science and Technology to coordinate the $50 billion in federal research funding "to ensure a strong and industrially relevant science and technology base."

The ability of America's biotechnology industry to compete in this vital market hinges on a unique alliance of federal research and regulatory agencies, industry, universities and financiers -- an alliance that has made the United States the world leader in this technology.

But precisely at this critical moment, when experts see the industry entering large-scale commercial production, that alliance is changing:

* U.S. government support for biotechnology research has ceased to grow and in some key areas has even declined. Regulatory policies toward biotechnology are uncertain.

* The huge flow of venture capital into the industry, which fed the growth of new, start-up biotech firms, has slowed to a trickle. Stock prices for young biotech companies have dropped nearly 50 percent since their peak in June 1983, according to Venture magazine. The industry is in a state of "consolidation," says one analyst.

* The momentum in the industry has shifted toward large, established chemical and pharmaceutical firms such as E. I. du Pont de Nemours & Co., W. R. Grace & Co., Monsanto and Eli Lilly & Co. They are making significant investments in both their own research and in their efforts to scale up for worldwide production, and are forming close ties with smaller start-up firms to gain access to their technology.

"If you look at the venture start-ups, I can't think of one that doesn't have a major agreement with a major health company," says Vivian Lee, a venture capitalist with New York's Euclid Partners. It remains to be seen how well these partnerships will work against their foreign rivals.

* The nature of biotechnology itself is dissolving traditional distinctions between basic and applied research, public and proprietary knowledge, and the academic and the business entrepreneur. Industry and Academe Join Forces

British biologist Cesar Milstein shared this year's Nobel Prize for his work in creating an important cell-fusion product called monoclonal antibodies, which has important research and diagnostic uses. He argues that his discovery illustrates the inherent "artificiality" of the lines drawn between basic and applied research. In biotechnology, pure university research and applied commercial research may be one and the same.

The speed of biotechnological innovation also is altering the traditional distinction between pure research and product. "The time between making a discovery on a lab bench and commercializing it is getting shorter and shorter," says Monsanto's Schneiderman.

Driven by these new biotechnological realities, corporations now must forge research relationships to assure that no new biotechnological technique will escape them.

For example, Monsanto, the diversified chemical company with sales of $6.3 billion, has a five-year, $23.5 million research agreement with Washington University of St. Louis, where more than 100 scientists are working on about 20 joint projects. Monsanto will have exclusive rights to much of the research.

Similarly, Hoechst AG, the giant West German pharmaceutical company, is financing the creation of a molecular biology research department at Boston's Massachusetts General Hospital at a cost of $70 million.

Du Pont, W. R. Grace and other leading companies with heavy investments in biotechnology have similar ties with universities.

Corporations clearly need to stay on top of quickly emerging technologies that speed into the marketplace. Indeed, universities and medical centers -- long used to running their basic research programs at a deficit -- have welcomed the inflow of capital and investment in their resource-parched facilities. But there are sharp debates within academic circles as to whether the corporate influence will corrupt the purity of a university's basic research mission, especially as the distinctions between basic and applied research blur. The university department faces the tacit threat of becoming primarily a research arm of a corporation.

At the same time, universities and their professors have nuzzled closer to industry as they seek to reap revenue from the fruits of their research. Many leading academics, including several Nobel laureates, have very close ties to biotech companies. Nobel laureate professor Herbert Boyer, whose genetic engineering patent is a cornerstone of biotechnology, cofounded Genentech in San Francisco. Walter Gilbert, another Nobel laureate, resigned from Harvard University to maintain ties with Biogen, a leading Boston-area biotechnology company, and avoid a perceived conflict of interest.

"Now that biology's coming of age, one must watch what's happening and watch it carefully," says Joseph Perpich, vice president of development for Meloy Laboratories Inc. in Maryland and formerly a top administrator with the National Institutes of Health. "We're going through a phase, and we don't know what the new equilibrium is going to be."

"There's been a quantitative and qualitative change in the nature of consulting," says Nobel laureate Paul Berg, who consults for biotech companies while serving as a Stanford University professor of biochemistry. "It used to be that you'd give advice to a company and maybe see someone once every three months on a fee-for-service basis. Now people actually have equity in a company, and that makes a big difference."

"Computer scientists lost their virginity a long time ago, and molecular biologists are just losing theirs," said John Linvill, who helped found Stanford's Center for Integrated Systems, a computer research facility.

But the morality of the marketplace can create ethical difficulties that universities reliant on public funding may wish to avoid.

"Universities have to take a strong stand precluding conflicts of interest and obligation," Berg says. "At Stanford, everybody is expected to disclose and be open about their research. I personally don't know of anyone who's been secretive."

But, secretive or not, the melding of academic and corporate research poses a set of interesting policy questions for NIH, the Department of Agriculture and other agencies that fund biotechnology research. If Washington University, which has a close relationship with Monsanto, receives NIH funding for biotechnology research, it is in an exceptionally good position to share its knowledge with its corporate partner on a nonproprietary basis. The NIH thus would be indirectly subsidizing Monsanto's basic research efforts.

In effect, the tightening alliance between key corporations and research institutions is gradually thrusting NIH into the role of a research investment banker. Corporations with academic ties are more likely to benefit from the research faster -- even if results are published at open and frequent intervals.

Similarly, academic institutions with generous corporate partners may find it easier to attract and keep the best professors and graduate students, and thus help assure the flow of government research funds.

These concerns became particularly acute when Hoechst AG and Massachusetts General announced their research arrangement in 1982. Several congressmen wanted to know whether it was a good idea for the NIH indirectly to fund research for a West German company that would use its newly acquired knowledge to compete against American companies in the marketplace.

"That is a public policy question," says Dr. William F. Raub, deputy director of extramural research for NIH. NIH agreed to continue supporting research at Massachusetts General after receiving assurances that such publicly funded work would not be kept as corporate secrets.

The NIH says that virtually all the research it funds belongs in the public domain. Despite this tradition, NIH now is responding to market forces and congressional pressures by using basic research funds to help build the nation's industrial base.

In a significant policy shift, NIH was authorized by Congress in 1980 to begin accepting funding requests from private industry as well as academic institutions. More importantly, NIH has scaled up a program of providing exclusive licenses and patents to researchers who make discoveries with NIH funds.

"We expect the number of exclusive patents to rise sharply over the next few years," said Itzhak Jacoby, director of NIH's Office of Medical Applications of Research, observing that most of the patent requests his office is examining are biotechnology processes and techniques.

Getting exclusive rights to discoveries is a very powerful incentive for companies to produce and market products. By encouraging companies to bring NIH-funded biotechnology research to market, the agency is playing an important role in improving the technology base of the entire industry.

"Technology transfer is an energetic emphasis of government," said NIH Director Dr. James B. Wyngaarden in a 1982 speech. Government works to transfer technology "to ensure that the public good is served both through the appropriate application of research results and the development of well-being of the country." The Challenge of Scaling Up

The needs of that industrial constituency clearly are changing. The industry is shifting from a research orientation that discovers products to a production emphasis that generates them in quantity. The question now facing the industry is whether it can scale up, or begin production, cost-effectively to meet the demands of a global market.

"The real competition is going to come in how well and and how economically you can produce the product," says Brian C. Cunningham, general counsel and vice president of government affairs for Genentech, the first of the genetic engineering companies. "There is not the same level of ability and development skills in the manufacturing levels in this country as there is in the basic [research] levels. We've got to get up the learning curve to learn the process technology.

"This is an area where companies in countries like Japan and West German are effective competitors," Cunningham adds. "Just as they've taken basic American technology and produced it more effectively in cars and electronics, we can see that same pattern developing" in biotechnology.

Indeed, a recent National Academy of Science report pointed out how U.S. companies lag in biotechnology processing. Until the 1960s, American companies led the world in amino acid production. Then the Japanese began an intensive effort to upgrade the manufacturing process by using very large bioreactors. Today, the Japanese dominate the $1.7 billion industry.

"Biotechnology is freighted by the peculiar and difficult need to deal with biological materials," says NAS President Frank Press. "It is these peculiar demands that make scaling up from the laboratory bench to commercial plants so difficult."

Unlike steel or plastics, which are inorganic and static, biological materials actually can mutate in the midst of production, effectively ruining any useful outcome.

Consequently, scaling up is a very capital-intensive process and serves as an effective barrier of entry to small companies with shallow pockets. Large chemical and pharmaceutical companies with the resources and production experience may be in the best position to commericialize research.

Yet the NAS report points out that foreign companies are moving more quickly than their American rivals to invest in biotechnology production processes. Basic technology for the membrane separation of biomolecules was invented in the United States, but the NAS says companies in West Germany and Japan are applying it to separate enzymes and amino acids from complex mixtures.

A processing facility in Britain can hold 400,000 gallons of biological materials, volume levels that have yet to be explored by U.S companies.

Similarly, West Germany's Institu t fu r Biotechnologie II, one of three federally funded biotech research labs there, alone spent $4.3 million in 1983 for biochemical engineering, a figure that equals the entire National Science Foundation's biochemical engineering budget for the same year. In fact, the NAS study maintained that West Germany's research space in biochemical engineering is nearly double that of the United States.

Japan likewise has invested heavily in biotechnological engineering processes. Government support of membrane technology alone amounted to $20 million in 1983. The NSF budget for this important production technology was less than $1 million for the same year.

A report this year by the Congressional Office of Technology Assessment found that "U.S. Government funding of generic applied research, especially in the areas of bioprocess engineering and applied microbiology, is currently insufficient to support rapid commercialization. U.S. Government funding for personnel training in these areas may also be insufficient," the OTA report said.

The competitive problem is particularly acute in the matter of trained personnel. "There are not enough technologically competent biochemical engineers in the U.S. today, nor are there enough faculty to train the engineers who will be needed by the emerging industry," the NAS stated in its recent report.

The same study estimated that the annual demand for graduate-level biochemical engineers over the decade will be two to three times greater than the available supply.

"We certainly would welcome government assistance in the training area," says Genentech's Cunningham.

But NIH's support for training has declined. The number of full-time equivalent training positions has been about 10,000 a year on average, according to NIH's Raub, who says that the number was about 50 percent higher in the late 1960s.

"Obviously we could always do more," says NIH Deputy Director Thomas E. Malone. "Our purpose is to pursue research congruent with our goals, not training for industry per se."

"There's been a real cutback; the size of grants are going down," says Stanford's Berg. "That's a real problem. Many people are underestimating the importance of training."

Nelson Schneider, managing director of a venture capital fund for investment in biotechnology, says: "It is critical for industry to have access to highly trained technicians. . . . You need them not only for industry, but for public programs, for the medical-delivery professions as well.

"You're not planting enough seeds," he says.

Whether the issue is training, basic research funding, or regulation of new products, the future of America's biotechnology industry depends as much on the government as on companies and universities -- the other members of this industrial alliance.