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Home Opinion Moving from economic uncertainty to prosperity with a global innovation consensus
Short-termism • Economy • Innovation •

Moving from economic uncertainty to prosperity with a global innovation consensus

Stephen Ezell - 07 September 2012

Amidst the global financial crisis, a unique opportunity to usher in an era of Innovation Economics has emerged. It is time to put innovation at the service of economic opportunity, transformation, and renewal

It’s hard to remember a time when economic turmoil and uncertainty gripped so many nations around the world for so long. The United States is still limping back from the startling hemorrhaging of jobs and evaporation of personal wealth it experienced from 2008-2010, while Europe’s sovereign debtload threatens a catastrophe with global ramifications.

However, the global economic crisis presents an opportunity to consider new ways of thinking about how to bolster productivity, create new products and services, and enhance standards of living. It comes down to one word: innovation. In Innovation Economics: The Race for Global Advantage, Robert Atkinson and explain that a fierce race for innovation-based economic growth is underway, as countries seek to compete and win in the highest-value added sectors of economic activity, such as information technology (IT), life sciences, and advanced manufacturing.

We show how a decade-long erosion in U.S. innovation-based global competitiveness was the precipitating cause of the Great Recession and accounts for the continuing anemic recovery. In fact, the book identifies the twenty leading causes of industrial and innovation decline—from poor labor-management relations, to business sector short-termism, to inadequate domestic investment—and explains how these same factors contributed to UK industrial decline from 1950 to 1980 and to the United States’ over the past decade.

In contrast, countries—like Germany and Singapore—that have been better able to weather the economic storm have been those that placed innovation at the center of their economic policies. If countries like the United States and United Kingdom wish to regain leadership in this race, they’ll need to do the same, with new tax, science and technology, education and immigration, regulatory, and trade policies.

What is innovation? In simple parlance, it’s the creation of new or improvement of existing products and services. But while we often think of innovation as purely science- or technology-based, it also applies more broadly to organizational or institutional innovation including the creation of new business models, development of new customer experiences, or implementation of superior processes. In today’s world, innovation is the Holy Grail for nations competing for high-skill, high-wage jobs and, ultimately, prosperity.

It might surprise many that the United States is not the world’s leading innovator. In fact, dazzling innovations such as the iPhone, Google, and Facebook from the U.S. IT sector mask troubling structural realities. In the last decade, the United States lost one-third of its manufacturing jobs—a greater share than during the Great Depression—saw its levels of venture capital investment and number of initial public offerings decline by 80 percent, and watched the research and development (R&D) and capital investment of its multinational corporations increase more rapidly abroad than domestically. As real wealth-generating investment opportunities in the United States contracted, America diverted capital to a housing bubble that burst with profound consequences. Today, according to ITIF’s Atlantic Century II report, the United States ranks second to dead last (43rdout of 44 nations and regions) at improving its innovation capacity over the past decade. U.S. performance is near the bottom for rates of change at enhancing its levels of higher-education attainment, number of scientific researchers per capita, and number of scientific publications per capita, while also scoring poorly at increasing its levels of corporate R&D, increasing broadband Internet usage and penetration, and improving its trade balances. (In fact, the United States tallied a $5.5 trillion trade deficit in the 2000s.)

In contrast, a growing number of developed and developing countries have implemented strategies to compete in cutting-edge sectors like nanotechnology, robotics, clean energy, and life sciences. They have dramatically reduced the tax burden on companies competing for global market share and provided incentives to invest in technology, machinery, equipment, education, and training. These countries understand that globally mobile enterprises shop the world to find the countries offering the best tax, infrastructure, talent, and regulatory environments in which to place their production and R&D activities. And they invest in R&D: while U.S. R&D as a share of GDP increased by just 10.4 percent from 1995 to 2008, R&D intensity increased by 20.5 percent, 135 percent, and 170 percent, respectively, in Germany, Singapore, and China. These countries also embrace government’s role as a partner with industry and as a first adopter and catalyst of innovation in health, transportation, and education systems.

Importantly, innovation policy is not “industrial policy,” in which governments select “national champion” companies or sectors. Rather, innovation policy seeks to create public-private partnerships to address the fact that market forces acting alone under produce societally optimal levels of innovation, in part because they often fall short in steering capital in the direction of high-risk, long term opportunities.

To be sure, not all countries’ innovation strategies are benign. An increasing number of countries are willing to bend or break the rules and take short cuts. Such “innovation mercantilists,” led by China, use a range of dubious policies to boost their exports and reduce imports. They manipulate currency values, trample on intellectual property rights, and manipulate standards, regulatory, and procurement policies to gain unfair advantage. They unabashedly favor their technology exports and companies in international trade at the expense of foreign firms. While such mercantilist policies can and do help countries win, they undermine the potential for global trade to benefit all countries and constrict the global supply of innovation, which the world badly needs to tackle a host of challenges in fields such as energy and public health.

We need a new international Innovation Consensus in which countries and global institutions commit both to thwarting these unfair, trade-distorting practices and to fostering competition based on “good” policies like investing in science, R&D, and education. Domestically, each nation faces a series of balancing acts: between the public and the private good, between individual freedom and collective responsibility, and between the needs of current and future generations. In Europe, we see the difficulty in this balancing act: while many leaders praise innovation, they also resist the constant transformation of an economy and its institutions that comes with it. Europe’s tendency is to want safe, science- and technology-based innovation, but not the Schumpeterian creative disruption that roils the balance of society and tradition.

In both the United States and the United Kingdom, to a degree, both the political Left and Right understand that their nations’ competitiveness is slipping; but for a new consensus to be forged on how to respond, both need to overcome their fixed notions. The Left will need to abandon its reflexive, anti-corporate stance and acknowledge that policies that help, not hurt, corporations are needed. The Right needs to abandon its strident anti-government ideology, and acknowledge the necessary role of government in helping spur innovation and bolstering the innovation capacity of a countries’ enterprises.

A unique opportunity sits before the United States and other countries to usher in an era of Innovation Economics. Citizens of all countries cannot be expected to wait out a generation as leaders make incremental adjustments to time-worn policies. It is time to put innovation at the service of economic opportunity, transformation, and renewal.

Stephen Ezell is a senior analyst with the information technology and innovation foundation (ITIF).

Innovation Economics: The Race for Global Advantage is published by Yale University Press.

This is a contribution to Policy Network's work on Reclaiming the supply-side agenda.

Tags: Short-termism , Economy , Innovation , Stephen Ezell , Opinion , Business , Growth , Education , Production , Wages , Robert Atkinson , Recession , Economic , Financial , Crisis

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