International Policy Digest

Pete Souza
Tech /13 Mar 2015
03.13.15

Overcoming the Erosion of American Innovation

Not so long ago, the Washington Post discovered that “innovation” is the most common tech word in President Obama’s State of the Union speeches. And yet, in Bloomberg’s new Global Innovation Index, the United States is snubbed at 6th place, although the U.S. topped the list only two years ago. Despite lofty rhetoric, America’s innovation suffers from structural erosion domestically and increasing pressures globally – as evidenced by recent analysis of U.S. innovation.

Many signals, but no sense of crisis

For most of the postwar era, America enjoyed superior leadership in innovation. It was the catch-up growth of Western Europe and the rise of Japan in the 1970s and 1980s that turned research questions into contested and consequential policy issues.

A slate of pro-innovation policy advances ensued as U.S. policy makers from both sides of the aisle launched a set of innovation and competitiveness policies like the Bayh-Dole Act, the R&D credit, the Cooperative Research and Development Act, the reorganization of the National Institute of Standards and Technology, the creation of the Small Business Innovation Research program, and a host of other policies and programs.

In the 1990s, the U.S.-led IT revolution seemed to slow down the innovation convergence, but only until the bubble burst in the early 2000s.

Despite recent huge investment in defense and security, the global crisis-related boost, and America’s faster recovery, America’s structural erosion in innovation continues. Despite signals from global innovation indicators and the relative decline in U.S. innovation performance, there is not yet a sense of crisis in Washington. Rather, the nostalgic myth of “We’re number one!” prevails.

A more nuanced picture of global competition for innovation tells a very different story.

Erosion in patents, R&D, and student performance

International R&D rivalry is no longer driven just by the U.S., Europe, or Japan, but also by Asia and particularly South Korea and China, as evidenced by significant shifts in student performance, R&D, and patents. Since 2000, the U.S. has no longer been featured in the top-10 PISA (Program for International Student Assessment) lists for mathematics, science, or reading.

According to the World Intellectual Property Organization, America dominated in total patent applications received from the early 1880s to the 1970s, when Japan caught up with the U.S. In 2010, China’s patenting overtook Japan; and two years later, the U.S. America’s erosion is reflected even by the higher-quality triadic patents in which inventors seek patent protection in the leading advanced markets. In these, the U.S. share has decreased to less than 30 percent – and adjusted to working age population, that share has declined by a fourth from 1999.

After the Great Recession of 2008–2009, global R&D growth has slowed, which can be attributed primarily to lingering U.S. recovery and stagnation in Europe and Japan. Meanwhile, China is likely to surpass Europe in R&D spending by the late 2010s and the U.S. by the early 2020s.

Erosion in defense, academia, and business

Since the end of the Cold War, U.S. federal funding for defense R&D has increased more gradually and recently actually declined. In the past decade, R&D by the Department of Defense (DOD) has shrunk by more than a fifth, as comprehensive analysis suggests.

In the aftermath of the global financial crisis, academic R&D, too, is facing its most daunting budget environment in a generation. While U.S. higher education institutions enjoy leadership in international rankings, lead nations invest more than double the U.S. level in funding university research.

American companies account for more than a third of R&D investment by the top 2000 companies worldwide, slightly more than Europe. However, China’s share of R&D spending has grown by a factor of 15 over the past decade, while spending has decreased in Europe (-1%) and North America (-6%).

Risk-taking remains typical to the U.S. business environment, particularly in Silicon Valley. America accounts for most global venture capital (VC) investments. But U.S. VC continues to suffer from the adverse repercussions of the Internet era’s “irrational exuberance” and the aftermath of the global financial crisis. Today, VC investments are less venturesome.

Initial public offerings (IPOs) tell a similar story. The number of venture–backed companies going public has fallen, while the dollars raised in IPOs have more than doubled. And foreign competition is catching up. In 2012, Facebook raised $16 billion of the total $21.5 billion. That pales in comparison with the historic $25 billion IPO of Alibaba whose market value was estimated at $231 billion.

Sustained innovation requires long-term investment

Before the global financial crisis, there were efforts toward a national innovation strategy in America. The National Innovation Act was introduced to the House of Representatives in January 2006, but failed to pass.

Next, the quest for a National Innovation Act led Congress and President George W. Bush to enact the 2007 American Competitiveness Initiative, as the America COMPETES Act, but the federal budget failed to allocate more than a fraction of the intended funds. Since 2011, President Obama’s A Strategy for Innovation has been constrained by similar obstacles.

In the absence of significant increases in investment for innovation, the current budget sequestration is likely to pave the way for further decline in innovation with accompanying slower economic growth and weakened global standing. With an appropriate innovation strategy, America could once again lead in the race for global innovation advantage — but not without national, credible, bipartisan and long-term investment.