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Innovation = Competitiveness

Maximizing the Innovation Equation

The competitiveness innovation link

Last week the Center for American Progress and its Doing What Works project launched a new policy platform aimed at bolstering U.S. economic competitiveness by better coordinating federal efforts around trade, education, infrastructure, and innovation, among other areas. To accompany the new report, for seven days CAP will be hosting an online discussion on competitiveness, innovation, and economic issues with a diverse array of heavy-hitting industry, labor, and political leaders.

The report aptly notes “that amid short-term efforts to address the consequences of the Great Recession, too little attention was being paid to the equally important job of increasing America’s long-term competitiveness.” And it lays out a number of policy recommendations aimed at reforming federal agencies in order to bolster long-term economic planning. What the report does not explicitly state, but some of these online discussion participants broach, is the central role that innovation must play in sustaining this long-term competitiveness, and the need for public policy to recognize and internalize the benefits of innovation’s positive externalities.

Too often in these discussions the idea of economic or industrial “planning” gets painted as a defunct communist idea and is accordingly cast aside. But that is 20th century thinking. What we are seeing all around the world in the 21st century is that there is nothing contradictory about long-term economic planning and the bottom-up, market-based capitalism that we all know and (most of us) love. Staying competitive in the 21st century means identifying national priorities, and using the levers of government to harness, rather than replace, private capital flows to achieve them. The benefits of innovation to society are largely external to the market, so we must have public policy to ensure that we get the most out of our markets as we can.

Although we know that innovation, broadly speaking, had been responsible for between half and three-quarters of all economic growth over the 20th century (or more, according to the Information Technology and Innovation Foundation) , the private sector alone tends to underinvest in innovation. As Rob Atkinson, president of the Information Technology and Innovation Foundation, notes in his comment, smart governments around the world are waking up to the fact that without innovation, they cannot stay competitive in the 21st century. They are realizing that innovation is competitiveness, and planning accordingly.

But in the United States, argues Atkinson, innovation continues to play second fiddle to neoclassical economic models that are more focused on “symbolic figures and quantities like prices, exchange rates, and the balances of payments to the neglect of real quantities, like goods and services produced and traded.” Ignoring the real economy, where innovation takes place, in favor of the financial one—where, as former Council of Economic Advisors head Michael Boskin famously said, there is no difference between a computer chip and a potato chip—is dangerous.

From the perspective of innovation economics there is a huge difference between potato chips and computer chips. Contrary to popular imagination, innovation does not happen only in labs, it happens on assembly lines and in board rooms and garages too. Innovation requires that industries on the cutting edge of technology continue to push the frontiers of what is possible. So every high-tech manufacturer that is replaced by a potato-chip maker takes with it not just the jobs and investment capital that power its operations, but also a little bit of our economy’s long-term innovation potential. This makes us less competitive in the long run.

The new CAP report does a good job of identifying the lack of public planning as one major hurdle to ensuring long-term competitiveness. But planning for planning’s sake is no good either without clearly defined goals, as Bruce Mehlman, the former assistant secretary of commerce for technology policy under President George W. Bush aptly notes on the Doing What Works competitiveness discussion board. So what are the goals?

Inputs and outputs of innovation

We know broadly speaking what the outputs of innovation are: New technologies, new firms, new industries, new jobs, and ultimately, economic growth, prosperity, and international competitiveness. Though it’s hotly debated whether and how innovation can be measured, we even have a few basic metrics of its success. Patents issued, venture-capital dollars invested, new companies and jobs created, and their market share, revenue, and/or profitability relative to various baselines can all help us to glimpse the overall effectiveness of our innovation economy.

If innovation is a function the final output of which (competitiveness) we want to maximize, perhaps identifying and prioritizing the inputs would be a good way to go about doing it. So what are the inputs?

Kevin Sharer, CEO of Agmen, Inc. in his comment on the discussion board lists five good candidates in the specific context of our biotechnology innovation system. The first is a robust fundamental science research base in our universities. As we have noted before at Science Progress, university research continues to play a major role in technological advancement, especially when university research, entrepreneurs, and sources of private financial capital can effectively collaborate to form nascent innovation networks. The World Economic Forum ranks the United States first in the world on university-industry collaboration in R&D, but scholars such as University of Southern California Vice Provost Krisztina “Z” Holly believe that we’ve only picked the low-hanging fruit, and that much more needs to be done to maximize the impact of universities in our national innovation system.

The second input is a strong intellectual property rights regime to reward innovators for their good ideas. The U.S. patent system certainly has shown its merit. As Sharer notes, “there is widespread acknowledgment that the government should be preventing and prosecuting piracy.” But legitimate questions loom about whether a first-come-first-served model for intellectual property rights are the right fit for every industry in the 21st century, and reform in our patenting system is desperately needed.

The third input is a “vibrant and working market,” with ample demand that can be awoken to draw new technologies out of labs and on to assembly lines quickly and decisively. New technologies require a source of “demand pull” in order to bridge the commercialization gap and scale up. Without this critical factor, technologies languish in a pre-market purgatory unable to bring their potential benefits to society.

In many industries across our nation, such as the relatively heavily regulated energy industry, the vibrancy of the market is muted by entrenched incumbent industries, perverse government subsidies, and/or general regulatory chaos. We need policy to ensure market demand for new innovation is strengthened in the high-potential sectors that are leading global economic growth.

Fourth, according to Sharer, is access to angel, seed, venture, and other forms of early stage capital. He notes that:

Scientific innovation is risky and competitive, and market-based rewards drive investment. Direct government investment in the private sector has historically been unsuccessful. But government tax incentives that drive research and development, encourage capital investment by allowing more rapid expensing, and expand credit for small- and medium-sized enterprises can complement the market. Investors in America are willing to reward risk takers who invent, discover, or develop innovative products and services—from the iPhone to Google to the electrical smart grid.

Yet especially in today’s capital-constrained fiscal environment, more is needed to tap flows of private capital to fund innovation in sectors of national priority. When trillions of dollars are invested in risky, securitized, mortgage-backed bonds while only millions are invested in areas of national concern such as clean energy, policy needs to change.

Fifth, Sharer sites our strong, transparent, and science-based regulatory system as an enabler of innovation. Having a consistent product regulatory system is essential to investors, who don’t want to see their investments go to waste due to a capricious or unpredictable government regulatory system. But there are many areas, again, with clean energy paramount among them, where our regulatory system has broken down and needs to be substantially addressed.

To this list we should add a few additional potential inputs for innovation. How about a work force highly skilled in science, engineering and math to help populate the universities, government research labs, and private R&D operations that are essential members of innovation ecosystems? How about a primary, secondary, and post-secondary education system capable of training these scientists, engineers, and entrepreneurs of the future? Last week Brian K. Fitzgerald of the Business-Higher Education Forum noted on Science Progress that:

In 2007, some 230,000 bachelor’s degrees were awarded in these fields to U.S. students, or fewer than 16 percent of all degrees awarded at this level. However, this share actually decreased during the past five years. Compared to the rest of the world, the United States has a significantly lower rate of degrees awarded in these critical subjects, ranking 27th among 29 developed countries. By contrast, China awarded nearly half of its first university degrees in these fields (47 percent), while South Korea awarded 38 percent and Germany awarded 28 percent.

Maintaining competitiveness in the 21st century over the long run will not be a passing fad of this administration, it must be a priority of every Congress of the coming century. And, as Dan Carol points out in his comment today, climbing out of this recession will require us to take a hard look at these underlying inputs of innovation, and “go fast” to bolster them in the short run as well. But over time, allowing our innovation inputs to continue to slip will erode the foundation that sustains our economic competitiveness. Reversing this trend will be hard, but losing our innovative high technology industries, and jobs they create, to China, Germany, India, Brazil, or others will be harder.

Policymakers will need to recognize the essential and irreplaceable role that innovation plays in our economic growth, and pursue policies that internalize and invest in its benefits. Innovation and competitiveness in the 21st century are inseparable. The Quadrennial Competitiveness Assessment, Biannual Presidential Competitiveness Strategy, the Interagency Competitiveness Task Force, and the Presidential Competitiveness Advisory Panel advocated for in A Focus on Competitiveness would do well to take a systems-thinking approach to measuring and strategically bolstering the inputs of innovation, so that we can all enjoy its outputs: progress, growth, prosperity, and yes, competitiveness.

Sean Pool is Assistant Editor for Science Progress and Climate Progress.

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