Understanding the value of innovation, where it comes from, and how to enhance it is vital for American policymakers trying to improve national economic performance.
Unfortunately, America’s innovation environment – our “national innovation system” (NIS) – is currently threatened by misguided public distrust of technological progress and the economic, political, and social institutions that help create it.
While the right cringes at “crony capitalism” and insists the government should not partner with private industries, the left equates business success to the “one-percent.” Combined, these viewpoints contribute to “neo-Ludditism,”a growing fear of innovation and technological progress, whether regarding genetically modified organisms (GMOs), big data, or automation. Misconceptions of how technology will impact privacy, labor markets, health outcomes, and personal freedoms are perpetuated by interest groups and the media and damage America’s ability to effectively compete internationally in the most advanced industries.
These trends are particularly troubling given the efforts of our global competitors to strengthen their own innovation systems and promote their use in boosting economic and job growth.
As I describe in a recent report, America’s National Innovation System is best understood as being comprised of three separate components: (1) a strong and collaborative business environment; (2) a supportive trade, tax, and regulatory environment; and (3) an innovation policy environment that supports research, entrepreneurship, and human capital development. Together, these three components can be visualized as an innovation “triangle,” with each “side” supporting a valuable success factor necessary for excelling in a globalized, knowledge-based, innovation-driven economy. Three strong sides will foster economic evolution and keep a nation at the top of the world economy.
It is clear that the first side of the triangle – the business environment in America – remains strong. U.S. firms are among the tops in the world in reinvesting profits in information technology goods, providing venture capital, and offering financing options to firms.
The second side of the triangle – the U.S. trade and tax environment – is also healthy. Because our system primarily focuses on protecting and benefitting consumers of goods and services—as opposed to producers—the United States erects few barriers to entry for new businesses. When market forces fail to deliver competition, stringent anti-trust policies ensure non-monopolistic prices for consumers. As a result, our regulatory, standards, and intellectual property systems are actually fairly good at keeping up with technology and adapting to accommodate new entrants.
Of course there is room for improvement. At times, businesses are caught focusing on short-term profits at the expense of long-term objectives as Americans become increasingly unwilling to invest in the future. Moreover, budget cuts for regulatory agencies means they have less ability to calculate the costs and benefits of individual regulations, decreasing efficiency and effectiveness. Consequentially, the regulatory burden for young firms has increased over the last 20 years, and it is now easier to open a business in Canada than in the United States.
But the national innovation policy environment, which used to be America’s strength, is perhaps the weakest component of the American innovation success triangle. The United States does not provide nearly enough federal funding for research and development (R&D) in pure and applied sciences, which has led to a steady decline in technological discoveries, advancements, and commercialization by U.S. companies. American labs and universities also fail to effectively facilitate technology transfers to the private sector or to develop the public/private partnerships which are necessary to produce successful high-tech innovation clusters.
Furthermore, the American education system produces an under-supply of graduates with the science, technology, engineering and math (STEM) skills demanded by the most advanced sectors of the economy. Finally, America turns away too many highly-skilled immigrants who create new businesses, engage in academic research, and infuse creative energy into the economy.
The United States used to have the world’s strongest innovation triangle. However, as other nations have realized and the United States has not, nations are currently in a race to build the most effective National Innovation Systems. The nation that wins this race will reap the rewards of future economic prosperity and global leadership that the United States enjoyed since the end of World War II. Already, American high-tech manufacturing strength is slipping and our advantage in science and technological discovery has greatly diminished.
To rebuild the world’s strongest National Innovation System, the United States must strengthen trade, tax, and regulatory institutions, implement policies to encourage research, human capital development, and the flow of ideas, and abandon its absurd phobia of scientific advancement. If we fail to do so, the United States will be left with a slower economy, fewer jobs and a less prosperous society overall.
[Cross-posted at Republic 3.0]