Invest in Innovation | The Nation


Invest in Innovation

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Don't Look Back

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Jim Manzi
Jim Manzi, the former chairman and CEO of Lotus Development, is chairman of Thermo Fisher, a $10 billion life sciences...
James S. Henry
James S. Henry is an economist, lawyer and investigative journalist, and former chief economist at McKinsey & Co....

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If it really is time for accountability, we should start by holding banks and financial institutions responsible for their actions and not allow them to rob us again with TARP II.

There is much less to Obama's stimulus plan than meets the eye. What's he going to do about it?

The other disturbing point about R&D spending is that American leadership has been slipping. Relative to other countries, the United States has long devoted a relatively high share of national income to R&D investment. Even now, it still accounts for a disproportionate share of all global R&D--at least 25 to 34 percent.

But while US R&D spending stagnates, key new competitors like China and Malaysia--and more mature ones like Korea, Singapore and the Nordic block--have been sharply increasing their innovation investment. And since innovation is by definition a matter of human skill and creativity, not just finance, it also matters that these new competitors have also sharply increased the share of skilled researchers and technicians in their labor forces. Our slippage has also been aided by our invisible "hegemon tax"-- the 50 to 60 percent share of R&D the US spends on warfare innovations.

Overall, many high-growth developing countries have already grasped a key point about economic national security that the United States is still struggling with: the global competitive marathon increasingly depends on productivity, innovation and scientific skill, not just command over natural resources or vast pools of untutored laborers.

US companies that once moved offshore simply because of cheaper inputs, lower taxes and weaker regulation are now finding that it pays to move their R&D centers offshore as well. This is partly because of the growing availability of engineering skills in places like India, China and Singapore, but it is also because of the higher barriers to immigration that foreign skilled workers have faced in the wake of 9/11. This policy may or may not have had much impact on terrorism, but by forcing these workers to remain at home, it has certainly had a negative impact on our economic security.

Troubled Waters: Private R&D

These disturbing trends in federal innovation spending have also been reinforced by recent trends in the private sector. As we saw earlier, private investment now accounts for more than 70 percent of all US R&D. Unfortunately, because of the current financial crisis and the emerging recession, this funding is drying up even as we speak.

This is especially true for venture capital funds that have relied heavily on so-called "limited partners" like pension funds and university endowments. Such investors often manage their portfolios with fixed allocations--reserving, say, 10 to 20 percent of investments to "alternative investments," especially the development side of R&D-intensive ventures. Given the stock market's steep decline, this approach to portfolio management and the need to rebalance asset allocations have virtually dictated a steep decline in private R&D funding.

Depending on how deep this recession is, and how much farther stock markets fall, this portfolio allocation effect will easily trim private R&D spending by 10-20 percent or more--in a budget that is already under-funded.

In uncertain times like these, when capitalism is most in need of real breakthroughs, many private corporations and investors become less patient and much less willing to invest in the kind of low-probability, long-lead-time projects that are the essence of basic research.


So what should we do about the innovation gap?

Stop eating the seed corn.

We must make investing in innovation the national priority that it deserves to be.

We need a significant boost in the current level of civilian R&D funding, along with increased tax credits and other incentives for basic research. Of course, this would require some increased federal spending, precisely at a time when the federal budget is likely to be strained. But as we've argued, the incremental amounts required are modest, while the paybacks are huge--the United States is just "one-half bank bailout" away from the kind of R&D funding that is needed.

We have to make this investment. As new competitors like China and India devote larger and larger shares of national wealth to technology, and keep more and more of their national savings at home, the days when we could simply borrow, cost-cut or "Wal-Mart" our way to prosperity are over.

Develop a solid technology strategy.

This is not a matter of industrial policy, picking winners or displacing private funding with government venture capital. We need to develop creative new ways to partner with private capital--including philanthropic donors and university endowments. The aim is to multiply the benefits, by focusing on what the government has always done best--replenishing the "seed-corn" with fundamental longer-term research.

This requires a fresh look at the appropriate role of government in innovation. From this angle, the current financial crisis may not be all bad. Given the disastrous example of excessive reliance on under-regulated markets and the proven track record of government R&D, this is an historic opportunity to design new ways for government and markets to collaborate .

Learn from our own innovation history.

Take a lesson from successful public-private collaborations in technology hubs like Silicon Valley, Boston and Austin. In all these cases, private venture capital and entrepreneurs played crucial roles--and so did federal dollars. For decades the federal government generously subsidized basic research in fields like engineering, biology, physics, chemistry and computer science at premier universities like MIT, Harvard, Stanford, Carnegie Mellon and the University of Texas.

Stanford University, for example, has received enormous federal research subsidies since the 1940s, and has become one of Silicon Valley's mainstays. Combined with the valley's highly competitive venture community, this provided the foundation for a technology hub that has transformed the world, with innovations like semiconductors, computer graphics and wireless communications, and companies like Intel, Apple and Google.

In Boston, the National Institutes of Health has played a key role in helping the community become a technology hub for biotech and pharma research. Boston's leadership in this arena is based on significant NIH funding, channeled to peer-reviewed researchers at regional teaching hospitals. Over time, the steady provision of federal tax dollars has supplied the grist for what has since become a self-sustaining innovation mill.

The questino is whether we can replicate innovative new Bostons and Silicon Valleys in other geographies, focused on energy, healthcare, the environment, education and transportation.

The point is not to dictate precisely what gets worked on but to marshal the human resources and infrastructure needed for innovation, build the partnerships with private institutions and insist on excellence.

What conditions would be needed to yield a period of sustained innovation in the automobile sector? Why not reserve, say, just a few percent of the $25 billion that the federal government is committing to the bailout of that industry's aging giants for the creation of an "automotive Silicon Valley"?

In such a hub, just as in Boston and Austin, a virtuous cycle of innovation and product development might be generated. Pockets of entrepreneurial companies would spawn others, competing aggressively and helping to free people and capital from big, slow-moving companies. Universities, communities and corporations would complement each other's very different styles and skills.

Longer term, a renewed focus on innovation as a source of national competitive advantage will also require us to reform and fundamentally redirect our education system, in order to deliver tens of thousands of highly skilled scientists and engineers. There's also a need for immigration reform to permit greater access to foreign-trained skills as an an alternative to the current scarce-visa system, which basically encourages potential skilled immigrants to stay at home, and our strongest competitor-countries to staff up their own technology-based industries. In this case, we're not just eating the seed corn; we're giving it away.

Finally, we need to nurture a national culture that reminds young people of their country's innovation heritage and encourages them to become engineers, designers and scientists, rather than just lawyers, accountants and bankers--whose preferred form of ingenuity, in Thornstein Veblen's words, has always been "clever chicanery, or the thwarting thereof." Now more than ever, in the interests of the planet as well as the nation, we need to curtail all this chicanery once and for all, and return to that stronger, prouder American business tradition, innovation on the real side of the economy.

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