Can America Keep Its Lead?

Friday, July 30, 1999
Illustration by William Bramhall

Innovation has become the operative word in business. From reengineering to corporate transformation to product “web-izing,” the idea is the same: finding ways to make money with a new product, service, or process. Now, however, warnings appear about the sustainability of U.S. innovation leadership.

A book published last year by the Council on Competitiveness in Washington, D.C., Going Global: The New Shape of American Innovation, details the weaknesses emerging in the national platform that supports innovation across industry sectors. The book grew out of an unprecedented study of more than a hundred research and development leaders at companies, universities, and laboratories representing over $70 billion in R&D investments. As the council’s Debra van Opstal put it, “The danger is that the unique set of conditions that have propelled the United States to a position of world leadership over the last fifty years is not sufficient to keep us there for the next fifty years.” The concerns are particularly sharp in the information technology (IT) sector.

William Hambrecht, noted venture investor associated with Adobe Systems, Genentech, and Sybase, phrased the threat succinctly: “The competitive challenge for the future is likely to come not just from low-cost producers, but from low-cost innovators.” For example, South Korea had a negligible position in the U.S. patent system in 1982 but has increased its patents by 40,000 percent since then. Now it is ahead of the United Kingdom and is coming up close behind Germany. Taiwan has increased its presence by 8,000 percent during the same time period. India’s highly regarded technical university system and low labor costs for programmers are promoting the country’s position as a technology center. Ireland’s incentives for the manufacturing sector have expanded to R&D. In effect, the “innovation club” is growing. The movement of IT manufacturing offshore—often promoted with tax incentives and subsidies—is challenging. The manufacturing sector accounts for 73 percent of business research. The concern is that, as manufacturing moves offshore, important, fundamental research pursued in the United States will diminish. In addition, the tendency to colocate certain types of research with manufacturing will also negatively affect the sustainability of design superiority in electronics and software. Although world trade in IT products and services is growing, the U.S. trade deficit in IT has increased for most of this decade.

Furthermore, federal funding drove a great deal of long-term, frontier research in the past. Since the 1980s, however, the government has been disinvesting in all forms of research and development. The significance of this trend is striking when you look at a list of innovations that depended on federal support: networking, computer graphics, parallel computing, and windows and mouse user interfaces are among those the council noted as major advances dependent on government investment.

How do we deal with the fact that the competition is getting better? According to Maurice Holmes, chief engineer of Xerox, the only way we can obtain competitive advantage is by using our advantage in information technology to “learn faster than the rest of the world.” Fast information diffusion through extended enterprises, strategic alliances, and public-private partnerships turbocharge the innovation process.

Holmes notes that innovation is occurring so quickly in hardware, software, and process that both the IT workforce and consumers face an increasingly difficult task in absorbing successive generations of technology. The ability to leverage information networks to diffuse information quickly and educate employees and consumers is one of the keys to success—both for companies and for national economies.

We know little about how to use information technology to increase learning rates and even less about how people learn. Less than one-tenth of a percent of the nation’s educational expenditures in grades K–12 is devoted to understanding what actually works in education, observed David Shaw, chairman and CEO of D.E. Shaw, in the council’s report. And no one has sufficiently explored the use of information technology to expand learning potential at any educational level. At the same time, we need to address the threats that offshore enterprises pose by creating an innovation-friendly regulatory environment. The permitted pace of IT write-offs, for example, often does not match reality. Our research system needs to be strengthened; our efforts at protecting intellectual property, both domestically and internationally, need to be redoubled. There is much to do.

Whether viewed in terms of high-wage jobs, national security, or economic vitality, our ability to compete internationally in the innovation arena is crucial. This goal is too important to be left to an innovation elite but should engage the efforts of the wider business, government, and university communities.