Tuesday, January 25, 2011

Is America losing its innovation edge?

Last week, Norm Augustine wrote an article for Forbes entitled Danger:  America is losing its edge in innovation. 

In the article Augustine cites a number of factors, such as the often Tweeted fact that US consumers spend more on potato chips than the government does in Energy Research and Development.  He also points to the fact that science and engineering are underrepresented in the US student body and that more and more patents are being awarded to entities outside the US.  This is all true, and should be warning signs for our economy.  While he's right, we are losing the innovation edge, the factors he states are lagging indicators at best, or misleading at worst, from an innovation perspective.  There are several reasons why.

First, let's consider the throw-away line that consumers spend more on potato chips than the government does on Energy research and development.  What should a relevant measure be?  How much the average consumer spends on oranges or bananas?  This is a non-sequitur of the first order.  What people choose to spend their money on in a free economy has no relevance or meaning to what our government spends on research.  Also, let's consider the energy sector in this country.  Other than perhaps the nuclear industry, none of the major energy sources were the result of government R&D.  The government didn't sponsor the early Texas oilmen, or the coal industry.  Perhaps the government did assist with the development of hydroelectric in the form of the TVA, but many would argue that the regulations the government imposed slowed the growth of the industry.  While our government did spend a tremendous amount of money in research during the cold war, there are two distinct problems with that approach today.  First, the government is more involved in more areas of our economy than it was then, and has extended itself too far and can't afford significant research and development.  What's more, the government is creating both a crowding-out problem and a regulatory burden contributing to less and less R&D. When the government suggests that it must enter the pharmaceutical R&D space since the major pharma companies don't provide enough new medications at appropriate prices, that should send warning signals.

What the government should do is make the risk taking of entrepreneurs more rewarding and lower taxes and provide incentives for new firms to grow, and larger firms to innovate.  We need the government to do its bit where R&D is concerned, but given the budgetary pressures and the growth of the government in a range of other areas, and the lethargy in converting R&D into new products within the government, it is risky at best to assume that more government R&D is the answer.

Second, Augustine assumes that more science and technology education and training in the US will mean more innovation.  In the past, innovation was driven by technology, and to some extent that will be true in the future.  However, innovation is a much more robust solution than merely new patents or technologies.  Look no further than Apple to see that one doesn't have to be a technology leader to be an innovator - innovation is created by new technologies, but also new processes, new services, new business models and new customer experiences.  The sooner we expand our definition of innovation and move beyond the simplistic equation that science and technology = innovation, the better.  That's not to say that science and technology innovation is not valuable, just that we need a much bigger perspective.

Third, regardless of where the technology and engineering happens, we need to continue to keep our creativity energy flowing.  We in the US have a very special petri dish for innovation, based on free markets, no rank or caste system, liquid venture capital and other funding, good education and a risk taking culture.  There are few, if any countries in the world that have our collection of attributes or that can even hope to attain them in the short run.  We need to reinforce these attributes and benefits, not detract from them.  Where products are made becomes less important than how they are imagined and designed, and who owns the intellectual property.

Fourth, we've allowed ourselves to be made comfortable by the fact that Steve Jobs and other creative people are "out there" doing the interesting innovation work so we don't have to.  Most of us would far rather rely on a few insightful others to create interesting products rather than take on the role ourselves.  We've become consumers of ideas rather than creators of ideas, outsourcing even the creative act itself.  Most of us live in a gray area defined by Teddy Roosevelt as a place with cold and timid souls who never tasted victory or defeat.  Rather, to continue, we should "spend ourselves in a worthy cause...best knowing in the end the triumph of high achievement and at worst, if we fail, at least we failed daring greatly."  That's a paraphrase, of course, but rather than living lives of quiet desperation, we need more people to live dangerously, with big ideas and big dreams.  We need to stop waiting for the government, a large enterprise, some nameless bureaucracy or some other agency to innovate, to create new things and do it ourselves.  Few great innovations spring from established bureaucracies - they have too much to lose.  Innovation is by its nature disruptive to established hierarchies, and thus is more likely to take root and succeed in smaller organizations and in individuals.

Finally, we've become accustomed to being told we are now behind.  Every day the news tells us that China will soon be the largest economy in the world.  India graduates more engineers each year than we graduate university students in total.  And so on.  We've already lost, so like the English of the early 20th century we should lie back and think of England.  Well, sure, China will be the largest economy in the world in a few years, but over half its population lives in poverty.  The Chinese have no choice but to create 20 million new jobs a year, each year, just to sustain unemployment levels.  We're falling behind only to the extent that the BRIC countries and others are "catching up", which is a good thing for us (opens new markets for our products and ideas) and them (improves standards of living worldwide).  Rather than resign ourselves to being the "second class" citizens, how about we define ourselves on what we do better than anyone?

Since de Tocqueville recognized in the 1800s an American exceptionalism, this country has been a leader in new ideas and innovation.  We can continue that far into the future, by focusing on our strengths, keeping our markets free, encouraging ideas and tolerating risks, encouraging free capital movement and strong intellectual property protection.  We need to encourage smaller entrepreneurs, and can expect to see many new businesses as the economy improves.  We need leaders of larger businesses to take more risks and focus on long term opportunities rather than short term market objectives.  What's interesting is that while larger enterprises become more risk averse and less innovative, the economic recovery will drive more innovation, if for no other reason than millions of unemployed people who seek new jobs will create their own, freed from the constraints of large corporations they'll unleash a lot of innovation completely outside any government program.  History demonstrates that in the aftermath of every significant downturn a flowering of innovation is created.  So in some regards Schumpeter's creative destruction is at work, destroying jobs and industries and laying the foundation for new ones.


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posted by Jeffrey Phillips at 6:56 PM

3 Comments:

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