How to get America back into Innovation

WASHINGTON – A recent Schumpeter column in The Economist magazine (“The Innovation Machine”, August 28 – September 3, 2010), provides interesting analysis on new insights about the “magic” and “mystery” of industrial innovation. Yes, mystery; because, notwithstanding scholarship, research and countless books on the subject, innovation is still more art than science: everybody wants it; but no one really has captured the secret of making it happen at will. Studies and formulas abund; but innovation remains elusive.

Ho do you make innovation happen?

Much of the problem rests in the fact that innovation is resisted. Indeed, real innovation supplants whatever may have existed before. Thus it is viewed as “the enemy” by all those managers, producers, marketers and others who benefit and profit from the current status quo. So, in the real, practical world, the notion that disruptive innovation can be nurtured from within a large corporation often meets barriers and opposition; because there are too many managers up and down the ladder who want things to continue as they are.

If this so, then does innovation happen entirely “out of the box”? Can it be pursued incrementally? Or does one need a business formula that is grounded on the notion of the necessary, rapid obsolescence of all we do today? Thus no sentimental attachment to today’s gadget, because, sure enough, tomorrow we shall invent a better one?

All this is very interesting, of course, and the experts can continue to dissect all the variables and the issues trying to come up with the best list of ingredients and how to mix them properly. 

What do we do when we lost it?

But, on a different level, what do we do when we realize that our rate of innovation is not what it used to be? What do we do when we see that we have fallen behind on most measures of competitiveness, for sure a consequence of a declining rate of innovation? What do we do when our education system loses ground, when the rate of domestic R& D goes down, when companies seem to have stronger incentives to invest abroad rather than at home? What do we do when competitors in relative as well as absolute terms are investing and innovating  “more” in sectors in which we used to be leaders?

The erosion of US competitiveness predates the “Big Crisis”

These are unfortunately the negative trends confronting the US these days. And these serious problems, while in some measure exacerbated by the current “Big Crisis”, certainly predate the financial meltdown  that almost chocked the entire US economic system. Indeed, it was not Wall Street that caused chronic underinvestment in our secondary education and public universities. It was not Lehman Brothers that dictated policy on tax credits for R&D. It was not AIG or Citigroup that determined national policy on whether or not to favor the immigration of capable scientists and entrepreneurs. Which is to say that, unless we properly address America’s declining competitiveness, even when we shall get out of this bad Wall Street/real estate bubble recession, when our housing markets will be stable again and our banks will be in better shape, many of the systemic problems that affect innovation and thus our ability to stay ahead in the global competitiveness race will stay unsolved, causing further harm and decline ahead.

The deterioration of a once coveted pro-business environment

Broadly speaking, it would appear that, due to lack of proper care, the vaunted, virtuous American innovation friendly “ecosystem” is rapidly deteriorating. That happy mix of good education institutions, easy industry-university cooperation, large doses of federal funds for a variety of research purposes, availability of venture capital to bankroll new enterprises and a generally receptive market place is unraveling. In fact, it is in such disrepair that, in the words of Paul Otellini, CEO of microprocessor king Intel Corporation, “The Next Intel may not happen here”. Think of it: We, the ever inventive Americans, may have lost it. The future giants of high tech may find a better breeding ground and a more suitable home somewhere else.

What is to be done? Well, at least “Do No Harm”

These and other sobering considerations were made by Paul Otellini, and former Hewlett Packard CEO Carly Fiorina, in the context of an Aspen Forum held in conjunction with the Technology Policy Institute (Aspen August 22- 24, 2010), a Washington, DC think tank chaired by Fiorina.

Again, as discussed above, nobody really knows the magic formula that will make valuable innovation happen. But, at the very least, we know that public policy may or may not create a more or less welcoming environment for new business and investments. And such an environment — while by itself no guarantee of success– is certainly a necessary precursor to innovation. Indeed, we know that, if we create and preserve a good place for business and investments, innovation is more likely to happen. In this vein, at the very least, public policy should avoid doing harm. Paraphrasing Hippocrates, “If you cannot help, at least do no harm”.

Paul Otellini: US policy-makers “flummoxed”, unsure

But, public policy does not withstand even this minimal test of “doing no harm”. According to Otellini, a respected leader who runs one of the few, and to date unchallenged US technology giants, and to Fiorina who has a long career in high tech and who is running as a Republican for a California Senate seat in November, Washington is somehow tone deaf.

It would appear, indeed, that we have a “digital country” and an “analog Hill”, (as in Capitol Hill, seat of the US Congress). Incredibly, in America, a country whose success is essentially predicated on rapid fire, quality innovation and enterprise, it seems that Washington is still stuck in an old tech (“analog”) past. Policy makers are thus dangerously ignorant and thus disconnected from the new fast paced reality and do not understand what it takes to nurture it.

In short: Washington policy makers, not due to anti-business animosity, but mostly blindsided by obsolete public policy models, simply “do not understand” what it takes to create a pro-innovation environment. Otellini said this much in a segment of the Q&As following his Aspen speech.

Our technocrats do not get it

Think of the implications of this terse judgment offered by one of the most respected US industry leaders. Our policy makers, this small army of Ivy League graduates manning the federal ramparts in Washington, this august assembly of super educated members of the intellectual elites, including the Harvard educated President Barack Obama and National Economic Council Director Larry Summers, economic science genius, former Harvard faculty, former Treasury Secretary and finally former Harvard President, according to Otellini, simply do not get what it takes to care and repair the US innovation making machine.

The dire implications of bad economic stewardship

So, no help from Washington. In fact worse: policies that in the end discourage investments and thus the chance to get more innovation. And the implications of all this are pretty awful. If America’s innovation machine stagnates or worse, forget our standard of living and our vaunted upward mobility; forget retaining our influence as a key economic player on the world scene; forget the US dollar as the world’s primary means of payment, forget current levels of US foreign aid, forget being the largest share holder within the World Bank Group, forget having the largest defense budget on earth and ultimately forget the age of American power and influence. For it is on retaining or regaining our ability to be the 24/7 laboratory-cum-workshop that keeps generating the new, high value stuff that the world wants to buy that we find the true foundation of American prosperity and ultimately influence.

How bad is it? Really bad

But are things really that bad? Well, yes, they are. The US now ranks sixth world wide in innovation, according to independent measurements. This in itself is not horrible. But what is really worrisome is that we are now dead last among 40 OECD nations regarding all the metrics by which innovation progress has been rated for the past ten years. And this means that, unless something changes, we shall lose more positions in the overall rankings in the years ahead.

Losing ground in higher education

In higher education, the US used to be number one in the world in terms of the percentage of the 25 to 34 years old population with a college degree. Now we have fallen to number 12. Looking further, the broader US public secondary education system –the pipeline that feeds American colleges and universities– is in complete disrepair. In this area, the Obama administration is really trying to have a major course correction, but it will take years of sustained effort before we can say that we turned the corner.

Business taxes are too high

The general investment climate is not that good. In his speech, Otellini indicated that, considering an overall $ 4 billion price tag for a new Intel plant, building one in the US represents an additional cost of $ 1 billion. And this is not about labor cost; but about taxes and lack of economic incentives, available elsewhere but not here, in the USA.

The US does not have a competitive R&D tax credit regime, while it has the second highest corporate tax rate in the world. In fact, R&D tax credits are a bit of a confusing guessing game. Instead of making them permanent, in order to offer a clear reference point to would be investors, the federal government makes these tax credits temporary and subject to renewal. The outcome is that these credits have expired and needed to be renewed 13 times. All this creates unnecessary confusion. It means that, for each new round, all industries, facing uncertainty and potentially higher costs to finance innovation, have to reengage in lobbying battles aimed at reaffirming what should be granted once and for all; thus aligning the USA with other countries that offer better tax treatment for R&D investments.

The cure: start with lower taxes and permanent R&D tax credits

If this is the picture, what policy changes would Otellini and Fiorina recommend in order to improve the general business environment, so that we can reverse the innovation downward trend? Their list is fairly elaborate.

But two items stand out:


1) Reduce corporate tax rates

2) Make more generous R&D tax credits permanent

Of course, all this needs to be fine tuned. There are broader fiscal implications for any major tinkering with the tax code, especially at a time in which Washington is trying to cope with astronomic fiscal imbalances. But the unassailable reality remains that, unless we create a more favorable business environment, mobile capital will flee where it is more welcome. End of story.

Favor the immigration of skilled professionals

On a different level, Fiorina indicated that we have to face up to our dearth of home grown qualified scientists, engineers and would be entrepreneurs. The number of highly skilled professionals legally allowed to come and work in the US, only 65,000 per year, is way too small to satisfy the needs of a large industrial environment. Until we can produce more of our own talent, it should be the policy of the United States to facilitate the immigration of more capable people, because these professionals reenergize our “brain power”. Indeed, very often they join and replenish the ranks of new wealth creating entrepreneurs. All this is amply documented by the figures of high tech start ups headed by capable immigrants.

Washington needs to learn how to do this

In the end, as Otellini said, it comes down to “getting it” regarding what should be done to nurture an innovative environment. In a non political way he ascribes the current non business friendly climate in Washington not to ideological “anti-business” animosity but to incompetence on the part of the crew right now running the show.

Policy confusion led to a policy vacuum that now discourages investments

A corollary to this lack of proper stewardship is the current policy vacuum. Money is parked in the sidelines because business leaders have no idea as to which way we are headed. There is confusion about the future of taxation, about future energy cost, about future environmental regulations and about future health care costs. It is up to Washington to clarify all these issues. Of course, depending on how these open policy issues will be settled, we can see a renaissance of investments and thus a boost to innovation or a faster exodus from America, thus hastening the pace of decline that we are already witnessing.

Let’s hope that the message sent by Fiorina, Otellini and many others will be listened to. Innovation is not just for Intel’s shareholders benefit. If we do not invent and market good stuff here anymore, the long and glorious history of American high tech leadership will come to an end –with damage to all of us.


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