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Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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Chapter 3

Findings

A fundamental challenge in making recommendations to improve the U.S. innovation system is that it arguably remains the best in the world. The U.S. is home to the vast majority of the world’s leading research universities. It has wide and deep capital markets, receptivity to innovative products, a culture and legal system that encourage entrepreneurship, and substantial public and private investments in research and development. The country also makes substantial investments in national security that can generate new products and develop new platform technologies.

The challenge for the United States is that the global environment is changing substantially and rapidly. Some of these changes, although they may require adjustments, are nonetheless quite positive, involving the production of more and better research and more and better-trained students. Globally, these trends represent a potential improvement in human welfare. On the other hand, changes in the competitive environment and, in particular, other countries’ focus on the application, commercialization, and local production of new technologies and new products pose challenges to the long-term health of the U.S. innovation system. A global system in which the U.S. does the research and other countries capitalize on the results to enhance the competitiveness and competency of their own economies is not in the U.S. national interest, nor is it sustainable.

Moreover, the security dimension of a robust U.S. innovation ecosystem cannot be ignored. U.S. leadership in innovation has been the source of U.S. economic and military power throughout the post-war era. The United States must continue to lead as an innovator and manufacturer of leading edge technologies and products, especially in the current environment where other nations are pursuing active innovation policies to enhance their world role.

Current financial constraints should not dictate U.S. policy in this crucial arena because the failure to preserve American technological leadership

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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imperils both our long-term prosperity and, very directly, our national security. Although the U.S. must exercise fiscal prudence as it wrestles with its debt and deficits, the Committee believes that the investments advocated below will repay the expenditures in the aggregate, paving the way for the economic growth necessary to help solve our fiscal problems in the long-term.1

While it is neither desirable nor possible to freeze the global allocation of production, it is essential that the U.S. recognizes that other countries are pursuing vigorous policies and programs, at increasing funding levels, to nurture and grow the industries of the future as well as revitalize those of today. Some of these policies are mercantilist in nature and include measures that distort the international location of productive activity through national regulation of investment and trade, forced technology transfer, and toleration if not promotion of intellectual property violations that undercut the basis for a rules-based trading system.

Success in promoting innovation – from invention through commercialization – is necessary not only for reasons of national security but to preserve and enhance the economic well-being of the American people. It is the key to maintaining the promise that the opportunities for each future generation will be better than those enjoyed by the preceding one.

This chapter presents the Committee findings. There are seven major findings, which are further elaborated in sub-findings. The organization of these findings and sub-findings is presented in an outline, below, as a guide to the reader.

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1 Although the Committee did not do a cost-benefit analysis of the policies and investments recommended in this report, the economics literature strongly suggests that investments in research, education, and infrastructure contribute to U.S. economic growth. See for example, Robert M. Solow, “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics, 1956, 70(1):65-94. Robert M. Solow, “Technical Change and the Aggregate Production Function,” The Review of Economics and Statistics, 1957, 39 (3): 312-320. Richard Nelson, Technology, Institutions and Economic Growth, Cambridge MA: Harvard University Press, 2005. Dale W. Jorgenson et al., Productivity: Information Technology and the American Growth Resurgence, Cambridge MA: MIT Press, 2005.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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OUTLINE OF FINDINGS

1. The future economic prosperity and security depends on sustaining the nation’s capacity to innovate—that is, translate our investments in research into new products for the market and new solutions for national missions.

a. The global environment is changing rapidly

b. A vibrant national innovation ecosystem is an essential component of U.S. security

c. The importance of innovation for jobs and technological leadership

2. Pillars of the U.S. Innovation System

a. The role of research universities

b. Research and development by the private sector

c. Federal support for emerging technologies

d. Public-private partnerships for the development of new technologies

e. Small business entrepreneurship

f. Talented immigrants

3. Advantages and Challenges in the U.S. Innovation System

a. U.S. advantages

i. An open innovation system

ii. Strong intellectual property rights

iii. Bankruptcy laws that permit risk sharing and recovery

iv. Worker mobility

b. Challenges for the U.S.

i. Fiscal constraints

ii. Declining federal R&D intensity

iii. Decline in university funding amid new challenges

iv. High non-production costs

v. Infrastructure and broadband enablers

4. Governments around the world have made the development of a globally competitive, innovation-led economy a top strategic priority.

a. Developing national strategies

b. Increasing commitments to R&D

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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c. Emulating global best practices

d. Pursuing mercantilist policies

e. Expanding universities

f. Providing early-stage finance

g. Attracting global talent

h. Focusing on building innovation clusters and science parks

5. U.S. leadership in innovation is eroding

a. The emergence of major global competitors

b. Growth of innovative regions around the world

c. Growth of offshore research centers

6. Capturing the Benefits of Investments in R&D

a. Research is a global public good

b. The need for a strategic approach

c. An institutional focus on translational research and applications

d. A focus on manufacturing

e. Trade and innovation are closely linked

7. Opportunities for Cooperation:

a. New opportunities and common challenges

b. Greater outreach

c. The internet and cross-border data flows

d. Greater awareness

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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FINDINGS IN DETAIL

1. The future economic prosperity and security depends on sustaining the nation’s capacity to innovate—that is, translate our investments in research into new products for the market and new solutions for national missions. Other nations are focused on developing greater capacity to translate research into marketable products. Although the U.S. innovation system remains the world’s most dynamic and productive, America’s continued standing as the premier location for producing new technologies and new high-technology products and services is no longer assured.

a. The Global Environment is Changing Rapidly2: As identified in earlier Academy reports, there are disturbing trends, notably between what the United States is doing and what it needs to do, compared with what the rest of the world is doing in terms of investments in education, infrastructure, research, new technologies, and measures to bring new technologies to the market.3 The U.S. international position as a location for the production of new processes and products is declining relatively as other nations, especially emerging economies, have accelerated their efforts to catch-up technologically.4

b. A Vibrant National Innovation Ecosystem is an Essential Component of U.S. Security: Leadership in innovation has been the source of U.S. economic and military power throughout the

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2 For an overview of new trends in global innovation, see Chapter 1 of this report.

3 As a recent National Academies report has noted, “Although many people assume that the United States will always be a world leader in science and technology, this may not continue to be the case inasmuch as great minds and ideas exist throughout the world. We fear the abruptness with which a lead in science and technology can be lost—and the difficulty of recovering a lead once lost, if indeed it can be regained at all. ”See National Academy of Sciences, Rising Above the Gathering Storm; Energizing and Employing America for a Brighter Economic Future, Washington, DC: The National Academies Press, 2007, p. 3.

4 The recent National Academies report S&T Strategies of Six Countries concludes “globalization has facilitated the success of formal S&T plans in many developing countries, where traditional limitations can now be overcome through the accumulation and global trade of a wide variety of goods, skills, and knowledge. As a result, centers for technological research and development (R&D) are now globally dispersed, setting the stage for greater uncertainty in the political, economic, and security arenas.” National Research Council, S&T Strategies of Six Countries: Implications for the United States, Washington, DC: The National Academies Press, 2010. Some analysts see the focus and investments of others as a challenge and an example of what needs to be done in the United States. For example, Ernst argues that “China’s innovation policy and its considerable achievements should serve as a wake-up call for America to mobilize the combined forces of private industry and government to upgrade its own innovation system.” Dieter Ernst, “China’s Innovation Policy is a Wake-Up Call for America,” Asia Pacific Issues, No. 100 (May 2011).

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     post-war era.5 Nations pursue active innovation policies not just for economic growth and jobs but also to enhance their world role.6 The United States will not be able to meet its defense needs without a robust economy that is able to and in fact does produce leading edge technologies and products.7 The composition of the American economy matters. This will require America building on its historical strength of melding of private ingenuity and public support.

c. The Importance of Innovation for Jobs and Technological Leadership: An assessment of a nation’s economic health must go beyond simple aggregate measures such as gross domestic product and include the ability to innovate and manufacture new products

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5 As the “Six Countries” report cited above notes, the globalization of innovation “will have a potentially enormous impact for U.S. national security policy, which for the past half century has been premised on U.S. economic and technological dominance.” National Research Council, S&T Strategies of Six Countries: Implications for the United States. Washington, DC: The National Academies Press, 2010. Bonvillian argues that “defense technology cannot be discussed as though it is separate and apart from the technology that drives the expansion of the economy—they are both part of the same technology paradigms.” William B. Bonvillian, “The Connected Science Model for Innovation – The DARPA Role,” in National Academy of Sciences, Board on Science, Technology, and Economic Policy, 21st Century Innovation Systems for Japan and the United States: Lessons from a Decade of Change, Washington, DC: The National Academies Press, 2009, pp. 206-237. See also David C. Mowery, “National Security and National Innovation Systems,” Journal of Technology Transfer (2009) 34:455–473. In addition to the security mission, military and defense related research, development and procurement have been major sources of technology development across a broad spectrum of industries that account for an important share of United States industrial production. See Vernon W. Ruttan, Is War Necessary for Economic Growth. Oxford: Oxford University Press, 2006.

6 For example, as Chinese President Hu Jintao noted in his Report to the 17th National Congress of the Communist Party of China, “Innovation is the core of our national development strategy and a crucial link in enhancing the overall national strength.”

7 Jacques Gansler argues that a strong and affordable national security posture must be built on a healthy economy: “a nation that devotes too many of its resources to the military rather than to the growth of its economy is likely to weaken its national power.” He further notes that the defense industry must remake itself through innovation to become responsive and relevant to the needs of twenty-first-century security. See Jacques S. Gansler, Democracy’s Arsenal, Creating a 21st Century Defense Industry, Cambridge MA: MIT Press, 2011. Leadership in enabling technologies such as semiconductors is critical to the U.S. military’s strategy of maintaining technological superiority, for example. See U.S. Department of Defense, Report on Semiconductor Dependency, Office of the Undersecretary of Defense for Acquisition, prepared by the Defense Science Board Task Force, Washington, DC, February 1987. Acceleration of innovation in clean-energy technologies is vital to the U.S. Army’s new advanced weapons programs and development of hybrid and electric-drive combat vehicles, which can provide important tactical advantages in the battlefield. See presentations by Grace Bochenek and Sonya Zanardelli of the U.S. Army Tank and Automotive Research, Development, and Engineering Center at the National Academies conference on Building the U.S. Battery Industry for Electric-Drive Vehicles: Progress, Challenges, and Opportunities, Livonia, Michigan, July 26-27, 2010.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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for the market, and the ability to create and sustain high skilled, high pay manufacturing jobs.8

2. Pillars of the U.S. Innovation System9: The U.S. Innovation system is built on the foundations of its robust research universities, substantial federal and private support for research and development, vibrant entrepreneurship including that of immigrants, and the often catalytic role of public-private partnerships in bringing new technologies to the marketplace.10 These pillars of the U.S. innovation system need to be preserved and reinforced.11

a. The Role of Research Universities: Research universities are engines of the American innovation system and have been a distinct U.S. competitive advantage in the post-War era.12 Federally funded university research has enabled some of the most important innovations of the modern economy, including computing, the laser, the fundamentals of global positioning systems, numerically controlled machines, the organization and deployment of the World Wide Web, the revolution in genetics, and much of modern medicine. 13

b. Research and Development by the Private Sector: Private firms have conducted two-thirds of R&D in the United States over the past decade. [See Figure 3.1] Since the late 1980s, nearly all of the growth in R&D spending in the United States has come from the

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8 Nelson argues that “technological advance is the key driving force behind economic growth” and highlights the importance of history, culture, and institutions in the development of new technologies. Richard R. Nelson, The Sources of Economic Growth, Cambridge MA: Harvard University Press, 2000.

9 For an overview of key pillars of U.S. innovation, see Chapter 1 of this report.

10 For example, the June 2011 launch of the Advanced Manufacturing Partnership cited cooperation between industry, universities, and the federal government as a critical component of the effort to enhance U.S. manufacturing and innovation. (http://www.whitehouse.gov/the-pressoffice/2011/06/24/president-obama-launches-advanced-manufacturing-partnership).

11 The recommendations to strengthen the pillars of the U.S. innovation system amplify key recommendations of the National Academies report Rising Above the Gathering Storm, op. cit.

12 See David C. Mowery and Bhaven N. Sampat, “Universities in national innovation systems,” Oxford Handbook of Innovation, 2005. See also, John Aubrey Douglass, “Universities, the US High Tech Advantage, and the Process of Globalization,” Berkeley Research Paper CSHE.8, 2008.

13 As Robert Birgeneau, Chancellor of UC Berkeley has noted, “To suggest that, somehow, universities are not and should not be engines of economic growth is missing the central point of how our economy grows and how we create jobs.” Quoted on NPR Morning Edition Date: 08-09-04. See also Kent Hughes and Lynn Sha, eds., Funding the Foundation: Basic Science at the Crossroads, Washington, DC: Woodrow Wilson Center, 2006. See Peter McPherson, David Shulenburger, Howard Gobstein, and Christine Keller, “Competitiveness of Public Research Universities & the Consequences for the Country: Recommendations for Change,” Association of Public and Land-Grant Universities, March 2009, (http://www.aplu.org/NetCommunity/Document.Doc?id=1561).

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     private sector.14 This investment, which is focused more on the application and development of knowledge, has yielded numerous innovations, contributing to U.S. competitiveness and economic productivity.15 For example, the applied science of drug development and clinical refinement of compounds carried out by the private sector is closely linked to new scientific discoveries that have been translated into new medicines.16 These major innovations by American private companies are typically built on platforms developed through long-term substantial U.S. public investments in basic research.17 It is important to understand that these public and private research efforts are complementary, with neither sufficient on its own, and thus the stagnant government R&D spending is a matter of concern.

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14 Industry R&D spending (in constant dollars) has increased over two and a half times during the past 20 years while federal R&D spending as a percentage of GDP has remained roughly constant. National Science Foundation, National Center for Science and Engineering Statistics, Science and Engineering Indicators 2012, NSB 12-01 (January 2012), Appendix Tables 4-1 and 4-7.

15 Congressional Budget Office, R&D and Productivity Growth, June 2005, http://www.cbo.gov/ftpdocs/64xx/doc6482/06-17-R-D.pdf.

16 Benjamin Zycher, Joseph A DiMasi and Christopher-Paul Milne, “The Truth About Drug Innovation: Thirty-Five Summary Case Histories on Private Sector Contributions to Pharmaceutical Science,” Medical Progress Report 6, June 2008.

17 As Zycher et al. (op cit) note, “Both NIH-sponsored and private-sector research are crucial for the advance of pharmaceutical science and the development of new and improved medicines. Research conducted at universities and government laboratories, often funded by the NIH or other government agencies, has been an indispensable component of the advance of pharmaceutical science and the development of new medicines.” As the Venture Capitalist Mary Meeker has remarked more generally, “Remember: private investment maybe have given us Facebook and Garmin, but public sector investment gave us the Internet and GPS.”

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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image

FIGURE 3.1 Private industry has funded almost two-thirds of R&D in the United States over the past ten years.
SOURCE: National Science Foundation, National Center for Science and Engineering Statistics, Science and Engineering Indicators 2012, NSB 12-01 (January 2012), Appendix Table 4-7.

c. Federal Support for Emerging Technologies:18 The United States Government has a long history of supporting the development and domestic production of emerging technologies. Federal support for new technologies played crucial roles in developing industries as diverse as the telegraph, radio, airframes, engines, space, nuclear power, computers, and of course the internet.19 These pervasive technologies have exerted a significant

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18 For a review of support for selected emerging technologies by the U.S. and leading European and Asian nations, see Chapter 6 of this report.

19 As Vernon Ruttan has observed, “government has played an important role in the development of almost every general purpose technology in which the United States was internationally competitive.” Vernon W. Ruttan, Technology, Growth and Development: An Induced Innovation Perspective, Oxford: Oxford University Press, 2001. See also Linda Cohen and Roger Noll, The Technology Pork Barrel, Washington, DC: Brookings, 1991. Cohen and Noll observe that there although there are failures, there are frequent major successes among federal R&D programs. They count among the successes telegraphy, hybrid seeds, aircraft, radio, radar, computers, semiconductors, and communications satellites. In short, much of the foundation for the modern economy. At the same time, Cohen and Noll stress that political capture by distributive congressional politics and industrial interests are one of the principal risks for government-supported commercialization projects.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     impact on U.S. productivity growth.20 The prospect that Federal funding for R&D that develops these innovations will diminish due to budget pressures is therefore a cause for major concern.

d. Public-Private Partnerships for the Development of New Technologies: Public-private partnerships have often played a powerful role in accelerating the conversion of new technologies into commercial products and in preserving the competitiveness of existing U.S. industries. 21 American research consortia such as SEMATECH22 and the Department of Energy’s recent Sunshot Initiative, long-term investments over many decades such as the Department of Energy’s funding for research and development for renewables, fossil fuels, and nuclear technologies, and competitive innovation awards such as the Small Business Innovation Research Program and the Technology Innovation Program23 are all

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20 See National Research Council, Funding a Revolution: Government Support for Computing Research, Washington, DC: National Academy Press, 1999. For a review of the positive impact of computers, communications technologies, and software on U.S. total factor productivity, see Dale W. Jorgenson, Mun S. Ho, and Kevin J. Stiroh, Productivity, Volume 3: Information Technology and the American Growth Resurgence, Cambridge MA: MIT Press, 2005. For a review of the positive impact of U.S. investments in energy technologies, see National Research Council, Energy Research at DoE: Was It Worth It? Energy Efficiency and Fossil Energy Research 1978 to 2000, Washington, DC: National Academy Press, 2001.

21A National Research Council Committee led by Gordon Moore concluded that “public-private partnerships, involving cooperative research and development activities among industry, government laboratories, and universities, can play an instrumental role in accelerating the development of new technologies to the market.” See National Research Council, Government-Industry Partnerships for the Development of New Technologies, C. Wessner, ed., Washington, DC: The National Academies Press, 2003, page 23. For a brief summary of the role of public-private partnerships through U.S. history, see Box 2.4 in Chapter 2 of this report. According to Kent H. Hughes, public-private collaboration played a key role in the recovery of the U.S. economy from its last period of economic malaise. He argues that similar collaboration is needed to address the competitive challenges of the 21st Century. Kent Hughes, Building the Next American Century: The Past and Future of American Economic Competitiveness, Washington, DC: Woodrow Wilson Center Press, 2005.

22 See Kenneth Flamm and Qifei Wang, “Sematech Revisited: Assessing Consortium Impacts on Semiconductor Industry R&D,” in National Research Council, Securing the Future, Regional and National Programs to Support the Semiconductor Industry, C. Wessner, ed., Washington, DC: The National Academies Press, 2003. See also Thomas R. Howell, Brent L. Bartlett, and Warren Davis, Creating Advantage: Semiconductors and Government Industrial Policy in the 1990s, Semiconductor Industry Association and Dewey Ballentine, 1992.

23 For a review of these programs and the challenges they address, see National Research Council, An Assessment of the Small Business Innovation Research Program, C. Wessner, ed., Washington, DC: The National Academies Press, 2008. See also National Research Council, The Advanced Technology Program, Assessing Outcomes, C. Wessner, ed., Washington, DC: National Academy Press, 2001. Also Lewis M. Branscomb and Philip E. Auerswald, Between Invention and Innovation: An Analysis of Funding for Early-Stage Technology Development, NIST GCR 02–841, Gaithersburg, MD: National Institute of Standards and Technology, November 2002.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     examples of public-private collaboration among researchers, private companies, entrepreneurs, and government agencies.

e. Small Business Entrepreneurship: “Equity-financed small firms are a key feature of the U.S. innovation system, serving as an effective mechanism for capitalizing on new ideas and bringing them to the market.”24 In the United States, small firms are also a leading source of employment growth, generating a very high percentage of net new jobs in recent years.25 These small businesses also employ nearly forty percent of the United States’ science and engineering workforce.26 Small businesses renew the U.S. economy by introducing new products and new lower cost ways of doing things, often with substantial economic benefits. They play a key role in introducing technologies to the market, often responding quickly to new market opportunities. 27

f. Talented Immigrants: America’s ability to attract the world’s best and brightest technological and entrepreneurial talent is an important element of its economic success and global leadership.

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24 See National Research Council, An Assessment of the SBIR Program, op. cit., See also Zoltan J. Acs and David B. Audretsch, Innovation and Small Firms, Cambridge, MA: MIT Press, 1990. See also Zoltan J. Acs and David B. Audretsch, “Entrepreneurship, Innovation and Technological Change,” Foundations and Trends in Entrepreneurship 1, no. 5 (2005): 1-65 and Boyan Jovanovic, “New Technology and the Small Firm,” Small Business Economics, 16(1) (2001): 53-55. The Small Business Administration’s Office of Advocacy defines a small business as an independent business having fewer than 500 employees. Access at http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24.

25 According to Robert Litan of the Kauffman Foundation,” Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less.” See also Small Business Administration, Office of Advocacy, “Small Business by the Numbers,” 2006. This net gain depends on the interval examined since small firms exhibit a much higher frequency of entries and exits than large firms. For a discussion of the challenges of measuring small business job creation, see John Haltiwanger and C. J. Krizan, “Small Businesses and Job Creation in the United States: The Role of New and Young Businesses.” In Are Small Firms Important? Their Role and Impact, Zoltan J. Acs, ed. Dordrecht: Kluwer, 1999. For a recent robust finding that small businesses do create more jobs, see David Neumark, Brandon Wall, and Junfu Zhang, “Do Small Businesses Create More Jobs? New Evidence for the United States from the National Establishment Time Series,” The Review of Economics and Statistics, February 2011, Vol. 93, No. 1, Pages 16-29.

26 Specifically, from 1993 through 2009:Q2, small firms (firms with fewer than 500 employees) accounted for 65 percent of net new jobs. Brian Headd, An Analysis of Small Business and Jobs, U.S. Small Business Administration, Office of Advocacy, March 2010. The report also noted that using a different data source and time period (1993-2006), small business accounted for 88 percent of net new jobs. Research commissioned by the Small Business Administration has also found that scientists and engineers working in small businesses produce fourteen times more patents than their counterparts in large patenting firms in the United States—and these patents tend to be of higher quality and are twice as likely to be cited.

27 For an extended discussion of the empirical evidence supporting the finding of high innovation performance of small firms, see Zoltan J. Acs and David B. Audretsch, Innovation in Large and Small Firms, An Empirical Analysis, The American Economic Review Vol. 78, No. 4, 1988, pp. 678690.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     Immigrants have often played a major role in the growth of innovative U.S. firms and are the source of a significant proportion of the startups in places like Silicon Valley.28 Some analysts find that foreign-born engineers were represented on the founding teams of 24 percent of Silicon Valley technology businesses founded between 1980 and 1998. 29

3. Advantages and Challenges in the U.S. Innovation System: The United States has some of the world’s best framework conditions that create a pro-innovation environment. These include an open and flexible innovation system, strong intellectual property-rights protection, constructive bankruptcy laws, well-developed capital markets, and extensive worker mobility. But the U.S. also faces significant challenges including high debt levels, inadequate federal support of R&D, declining university funding, and under-funded, subpar infrastructure.

a. U.S. Advantages30

i. An Open Innovation System: The U.S. economic system is relatively open to new entrants and that, along with a premium placed by society on entrepreneurship and risk-taking, makes it among the best in the world in terms of encouraging firm formation and growth. The United States consistently ranks high in the World Bank’s Ease of Doing Business rankings, placing 5th in the 2011 report.31

ii. Strong Intellectual Property Rights: Secure rights to intellectual property encourage companies to develop and commercialize new technologies. The new legislation to modernize U.S. patent, trademark and copyright laws along with efficient systems to assign ownership are intended to

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28 See the related discussion on “Hunting for Global Talent” in Chapter 2 of this report.

29 See AnnaLee Saxenian, Silicon Valley’s New Immigrant Entrepreneurs, San Francisco: Public Policy Institute of California, 1999. A follow-up study found that of all U.S. technology companies founded between 1995 and 2005, one-quarter had chief executive officers or chief technology officers who were foreign-born. See Vivek Wadhwa, Ben Rissing, AnnaLee Saxenian, Gary Gereffi, “Education, Entrepreneurship and Immigration: America’s New Immigrant Entrepreneurs, Part II,” Duke University Pratt School of Engineering, U.S. Berkeley School of Information, Ewing Marion Kauffman Foundation, June 11, 2007.

30 See the related discussion in Chapter 1 of this report, which describes the “Pillars of U.S. Innovative Strength.”

31 The World Bank and International Finance Corporation, Doing Business 2011 (2010), Table 1.2. The U.S. is compared with 182 other countries.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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      encourage the formation and location of knowledge-intensive industries in the United States.32

iii. Bankruptcy Laws that Permit Risk Sharing and Recovery: Bankruptcy laws that balance creditor and borrower rights are essential for a well-functioning innovation system. They provide incentives for lenders to select and monitor their investments more carefully, and by permitting recovery, they also allow for borrowers to share some of their risk.33

iv. Worker Mobility: Employee mobility increases dissemination of knowledge, in turn feeding innovation and economic growth.34 Significant labor mobility gives the United States advantages vis-à-vis other countries that seek to ensure an unusually high level of protection for workers from dismissal. Strong employment protection is often a disincentive for enterprises seeking to hire new workers and, in aggregate, leads to lower productivity growth.35

b. Challenges for the U.S.

i. Fiscal Constraints:36 America’s high budget deficits and debt burden are exerting extraordinary pressure on lawmakers to cut spending on the very investments needed to keep the U.S. ecosystem competitive and to drive growth: in universities, applied-research programs, incentives for small business, new energy technologies, and improved transportation and

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32 The Leahy-Smith America Invents Act was signed into law by President Barack Obama on September 16, 2011. This law, which represents the most significant change to the U.S. patent system since 1952, drew on the recommendations of a National Academies panel. See National Research Council, Patents in the Knowledge-based Economy, W. Cohen and S. Merrill eds., Washington, DC: The National Academies Press, 2003.

33 Joseph Stiglitz, “Bankruptcy Law; Basic Economic Principles,” in Stijn Claessens et al. eds., The Resolution of Financial Distress, An International Perspective on the Design of Bankruptcy Laws, Washington, DC: The World Bank, 2001. The United States Constitution (Article 1, Section 8, Clause 4) authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States.” The current U.S. Bankruptcy Code was enacted in 1978: The Bankruptcy Reform Act of 1978 (Pub.L. 95-598, 92 Stat. 2549, November 6, 1978). Code has since been amended, most recently in 2005.

34 Tracy R. Lewis and Dennis Yao, “Innovation, Knowledge Flow, and Worker Mobility,” Wharton School Working Paper Series, 2001.

35 In a 2008 review of labor laws in Indian states, for example, the World Bank noted that “States that amended the legislation in the direction of reinforcing security rights of workers and other prolabor measures had lower output and productivity growth in manufacturing sector than those who did not change it or made it more flexible.” World Bank, India Country Overview, 2008.

36 See the related discussion on the “Rapid Growth of R&D Spending” overseas and the composition of U.S. R&D expenditures in Chapter 1 of this report.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     information-technology infrastructure.37 Failure to sustain adequate investments in these areas will inflict long-term damage on America’s innovation ecosystem, economic growth, and the welfare and security of its citizens.

ii. Declining Federal R&D Intensity: Federal funding for R&D as a percent of GDP is in a long-term decline. 38 [See Figure 3.2] Total U.S. R&D spending has risen over the past 20 years, driven by a more than two and a half times increase in industry R&D spending. But it is important to note that the private sector spends nearly three-fourths of its R&D budget on applied research and development activities. Given the particular importance of federal R&D expenditures for basic research, the long-run implication of stagnant federal investment is “slower technological progress and hence slower growth.”39

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37 National Research Council, Choosing the Nation’s Fiscal Future, Washington, DC: The National Academies Press, 2010.

38 The European Union has adopted a 3% target but with limited success. However, both France and Germany have significantly increased their R&D spending to 2.1% and 2.5% respectively. The Merkel government has committed to 10% of GDP for research (3%) and education (7%). President Obama announced a goal to devote more than three percent of GDP to R&D. “Remarks by the President at the National Academy of Sciences Annual Meeting,” The White House, Office of the Press Secretary (April 27, 2009).

39 For a detailed affirmation of the importance of national investments in R&D for economic growth, see Ben S. Bernanke, “Promoting Research and Development: The Government’s Role” Speech presented at the Conference on New Building Blocks for Jobs and Economic Growth, Washington, DC: May 16, 2011. For a review of postwar R&D trends, see Linda Cohen and Roger Noll, “Is U.S. Science Policy at Risk? Trends in Federal Support for R&D, Washington, DC: Brookings, 2001.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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FIGURE 3.2 Federal funding for R&D as a percent of GDP is in long-term decline.
SOURCE: National Science Foundation, National Center for Science and Engineering Statistics, Science and Engineering Indicators 2012, NSB 12-01 (January 2012), Figure 4-2.

iii. Decline in University Funding Amid New Challenges: The quality and reputation of U.S. research universities has been built on a foundation of sustained and substantial federal and state funding.40 Even as countries around the world reform their higher education system, and create new technical institutes and research universities, and increase support for university research, we are underfunding institutions that have

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40 Pavitt notes that key features of U.S. innovation policy have been “massive and pluralistic government funding, high academic quality, and the ability to invest in the long?term development of new (often multidisciplinary) fields.” See K. Pavitt, (2001) Public Policies to Support Basic Research: What Can the Rest of the World Learn from US Theory and Practice? (And What They Should Not Learn).” Industrial and Corporate Change Volume 10, Issue 3 Pp. 761-779.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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      proven to be enormously successful in sustaining U.S. leadership in science and technology, with their benefits for growth, employment and security.41

Although U.S. research universities have long been recognized as the engines of the American innovation system, today’s universities face a host of unprecedented challenges:

•    Rapid Expansion in Knowledge: These include an exponentially expanding knowledge base made possible by new information and communications technologies and the changing needs of a knowledge-driven society.42

•    Growth in Regulations: The growth in federal regulations and reporting requirements, in combination with other factors, is straining university resources and is diverting faculty time from its missions in research, education, and innovation. 43

•    Increased Competition for Resources: Universities face the need to be more responsive to competition: for students who demand more value from high tuition bills, for leading professors actively sought by other U.S. (and increasingly overseas) institutions, and for grants and contracts from government agencies, foundations, and private firms.44

•    New Mission to Innovate: Going beyond their traditional missions to educate and conduct research, universities are also increasingly “going to market”—seeking to commercialize their research to raise revenues to sustain academic quality and ensure financial stability.45 This new mission also addresses the call by states and regions for research universities to serve as sources of

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41 See Keld Laursen and Ammon Salter, “The fruits of intellectual production: economic and scientific specialisation among OECD countries,” Cambridge Journal of Economics Volume 29, Issue 2, 2005, Pp. 289-308. Reviewing data across the OECD, the authors conclude that “it is important to have high levels of relevant to-the-industry scientific strength per capita in order to be specialised in science-based industries.”

42 See Robert Zemsky and James J. Duderstadt, “Reinventing the Research University; An American Perspective,” in Reinventing the Research University, Luc E. Weber and James J. Duderstadt, eds., London: Economica, 2004.

43 See Tobin L. Smith, Josh Trapani, Anthony Decrappeo and David Kennedy, “Reforming Regulation of Research Universities,” in Issues in Science and Technology, Summer 2011.

44 See Robert Zemsky and James J. Duderstadt, op. cit.

45 Ibid.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     entrepreneurship and regional growth.46 While this is in general a positive development, universities need to adapt their organizational culture to support this new mission.

iv. High Non-production Costs: Non-production costs, including corporate taxes and health care costs, put the U.S. at a disadvantage as a place to invest.47 Nations such as Japan, Canada, the Netherlands, and South Korea have sharply lowered their corporate tax rates since the 1990s, leaving the U.S. with one of the highest nominal corporate tax rates among OECD nations, although effective tax rates are considerably less.48 U.S. businesses are also less competitive globally because they bear the expense of surging U.S. healthcare costs.49

v. Infrastructure and Broadband Enablers:50 Other nations are investing heavily in state-of-the-art broadband networks, mass-transit systems, clean power plants, and modern airports while much of the physical infrastructure in the United States

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46 See presentation by University of Maryland President Dan Mote, “Universities as Drivers of Growth in the United States,” in National Research Council, Building the 21st Century: U.S. – China Cooperation for Science, Technology, and Innovation, C. Wessner, rapporteur, Washington, DC: The National Academies Press, 2011. See also the presentation by University of Hawaii President M.R.C. Greenwood, “Presentation of the Hawai’i Innovation Council Report” at the National Academies Conference, E Kamakani Noi`i—Fostering Knowledge-based Growth in Hawaii, January 13-14, 2011.

47 The Manufacturing Institute estimates that non-production expenses such as high U.S. corporate taxes, torts, and pollution control put American-based manufacturing at an 18 percent structural cost disadvantage compared to major trading partners and more than a 50 percent disadvantage to China. Jeremy A. Leonard, “The Tide Is Turning: An Update on Structural Cost Pressures Facing U.S. Manufacturer,” The Manufacturing Institute and Manufacturers Alliance/MAPI, November 2008.

48 Chen, Duanjie, and Jack Mintz, 2010. “U.S. Effective Corporate Tax Rate on New Investments: Highest in the OECD.” Tax & Budget Bulletin No. 62. Cato Institute, Washington, DC. However, according to the Government Accountability Office (GAO), “Statutory tax rates do not provide a complete measure of the burden that a tax system imposes on business income because many other aspects of the system, such as exemptions, deferrals, tax credits, and other forms of incentives, also determine the amount of tax a business ultimately pays on its income.” The GAO estimated that “[t]he average U.S. effective tax rate on the domestic income of large corporations with positive domestic income in 2004 was an estimated 25.2 percent.” GAO, “US Multinational Corporations; Effective Tax Rates are Correlated with where Income is Reported.” GAO-08-950 Report to the Senate Committee on Finance, August 2008. Unlike the United States, other countries rely on indirect taxes (such as the VAT) which imposes a portion of the country’s social costs on imports and relieves them on its exports. Direct taxes (such as the corporate income tax) are not borderadjustable.

49 Toni Johnson, “Health Care Costs and U.S. Competitiveness,” Washington, DC: Council of Foreign Relations, March 2010. Access at http://www.cfr.org/health-science-andtechnology/healthcare-costs-us-competitiveness/p13325. The article lays out divergent views on the competitive impact of health care costs, importantly noting the disparate impacts of these costs on different industries and types of companies.

50 See the related discussion on “Improving Framework Conditions,” in Chapter 2 of this report.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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is becoming outmoded and in disrepair due to underinvestment.51

4. Governments around the world have made the development of a globally competitive, innovation-led economy a top strategic priority. To this end, many countries are developing national strategies and adopting, adapting, and strengthening what they see as successful elements of other innovation systems, in particular those of the U.S. system.

a. Developing National Strategies:52 Both advanced and emerging nations such as China, India, Russia, Germany, South Korea, and Finland, have formulated - or are seeking to formulate comprehensive national strategies for improving their innovation capacity and are backing them with substantial public investments, broad policy support, and attention at the highest levels of government.53

b. Increasing Commitments to R&D:54 Investments around the world in education, research, and new products are rising. This is an overall a positive development, with benefits for people all over the world— for example, in solving global health problems—as

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51 The World Economic Forum now ranks U.S. 16th in infrastructure. World Economic Forum, The Global Competitiveness Report 2011-2012 (2011), table 5. Also see American Society of Civil Engineers, 2009 Report Card for America’s Infrastructure, March 25, 2009.
51 Data from U.S. federal agencies cited in Eric Kelderman, “Look Out Below! American’s Infrastructure is Crumbling,” Stateline.org, Pew Research Center, Jan. 22, 2008 (http://pewresearch.org/pubs/699/look-out-below).

52 For an extended review of the “New Global Competitive Environment,” including the accomplishments and ambitions of China, India, Germany, and others, see Chapter 5 of this report.

53 China’s 15-year comprehensive innovation strategy is described in State Council of China, “National Medium- and Long-Term Program for Science and Technology Development, 20062020.” Germany’s innovation strategy is described in Federal Ministry of Education and Research, Ideas. Innovation. Prosperity. High-Tech Strategy 2020 for Germany, Innovation Policy Framework Division, 2010. Canada’s national strategy is described by Industry Canada, Mobilizing Science and Technology to Canada’s Advantage — 2007. (Access at http://www.ic.gc.ca/eic/site/ic1.nsf/vwapj/SandTstrategy.pdf/$file/SandTstrategy.pdf) India’s National Innovation Council has published a new innovation strategy on March 2011: Towards a More Inclusive and Innovative India, (Access at http://www.innovationcouncil.gov.in/images/stories/report/Innovation_Strategy.pdf. For an explanation of South Korea’s strategy, see Vision 2025, Korea’s Long Term Plan for Science, Technology, and Development. For a review of Finland’s most recent innovation strategy, see “Tekes Strategy: Growth and wellbeing from renewal,” Tekes 2011. Access at www.tekes.fi/en/document/49702/tekes_strategy_engl_2011_pdf. A National Academies report on innovation policies in six countries concluded that some countries such as China and Singapore are most likely to achieve their five-year S&T goals while others such as Brazil and India will likely have more limited success. National Academy of Sciences, S&T Strategies of Six Countries, op. cit.

54 See the related discussion, “Substantially Increasing R&D Funding,” in Chapter 2 of this report.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     countries seek greater returns on their R&D investments.55 And although the United States still leads the world in R&D spending, emerging economies are increasing resources to R&D at a much faster rate [See Figure3.3] while real U.S. federal R&D spending has remained roughly constant for the past two decades.56

c. Emulating Global Best Practices: At a time when U.S. public investments are threatened with major reductions, other nations are devoting ever-greater government funds to develop their innovation systems. 57 In many cases they are actively seeking to replicate what they see as successful U.S. policies and programs. These include policies to strengthen R&D partnerships linking research universities and industry, and programs to provide risk capital and training for technology entrepreneurs.58

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55 The European Union established in 2000 a three percent of GDP target for R&D spending by 2010 for European nations, but only limited progress toward this goal has been achieved. Recently, both France and Germany have significantly increased their R&D spending to 2.1% and 2.5% respectively. The government of Chancellor Merkel has committed to 10% of GDP for research (3%) and education (7%) by 2015. Federal Ministry of Education and Research, Federal Report on Research and Innovation 2010, Innovation Policy Framework Department 2010.

56 While the U.S. federal government spent approximately $148 billion (FY 2010) on R&D, defense R&D made up over half of this amount. Further, about ninety percent of defense R&D is for defense related technology development (including weapons testing). See AAAS Report XXXVI FY 2012. Thus the effective U.S. expenditures on basic and applied research is much smaller than the overall figure suggests.

57 South Korea has boosted R&D spending from 2.27 percent of GDP in 1995 to 3.37 percent in 2008, for example. China’s R&D spending has risen from 0.57 percent of GDP to 1.54 percent, and China’s plans call for it to reach 2.5 percent by 2020 while it’s GDP has expanded at a remarkable average rate above 10% per annum since 1990. Japan’s ratio has gone from 2.92 percent in 1995 to 3.42 percent in 2008 and Finland’s from 2.26 percent to 3.73 percent. OECD, OECD Main Science and Technology Indicators, Volume 2010/1, May 2010, Table 2. Under its current five-plan, Singapore tripled R&D investment, to $10 billion.

58 For example, Japan, Canada, and China are among the countries that have implemented reforms modeled after Bayh-Dole to incentivize universities to commercialize research and encourage universities and national labs to collaborate with industry. Innovation Programs such as the SBIR and the Sematech Consortium have been widely emulated. Countries as diverse as Sweden, the Netherlands, India, South Korea, and Russia have adopted SBIR-type programs. Based on what they saw as the success of the Sematech consortium, Japan established a series of consortia to advance their domestic semiconductor industry in the 1990s. See National Research Council. 2009. 21st Century Innovation Systems for Japan and the United States: Lessons from a Decade of Change. S. Nagaoka, M. Kondo, K. Flamm, and C. Wessner, eds. Washington, DC: The National Academies Press. For a discussion of the origins and achievements of Sematech, and subsequent emulation, see National Research Council, Securing the Future, Regional and National Programs to Support the Semiconductor Industry, op. cit. For an evaluation of SEMATECH, see Kenneth Flamm, “The Impact of SEMATECH on Semiconductor R&D,” in that volume.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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image

FIGURE 3.3 R&D spending growth by emerging economies is significantly faster than in developed countries.
SOURCE: UNESCO, UNESCO Institute for Statistics, Science and Technology, Table 25.
NOTES: GERD refers to gross domestic expenditure on R&D. Percent refers to average annual growth rate for 1996 to 2008. India growth rate is based on 1996-2007. R&D growth in China, India, and Korea has expanded rapidly, though starting from a small base. Some countries have not been able to maintain their R&D growth targets.59

d. Pursuing Mercantilist Policies:60 Government enterprises (stateowned, state-invested or state-supported) engaged in commercial

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59 For instance, in his 2000 Presidential address to Indian Science Congress, then Indian Prime Minister Atal Behari Vajpayee promised to raise R&D spending to 2 % of GDP. However, R&D spending in India has yet to cross 1 % of GDP. In 2012, Prime Minister, Dr. Manmohan Singh again pledged the same target.

60 See related discussion of the character and impact of 21st Century Mercantilism in Chapter 1 of this report.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     activities remain a powerful force in the global economy.61 Their effects on innovation are felt in a variety of ways. The intention of many governments, for example, China, is to develop these enterprises as centers of innovation. The policies have not yet proved themselves sound in terms of creating nodes of innovation, but they do affect the capture of the economic value of global innovation in multiple ways:

i. Their impact on international trade and investment.

ii. Lack of enforcement of intellectual property laws is another means affecting the capture of the economic value of innovation that costs foreign private sector competitors tens of billions of dollars of lost revenues.62

iii. Forced or induced technology transfer as a condition of investment further dilutes the value of innovation to the innovator.

iv. Denial of market access.

Successive U.S. Administrations have made some progress in addressing these problems but progress has been limited.

e. Expanding Universities:63 More positively, other nations and regions are dramatically increasing funding to upgrade, expand, and open new research universities and science-and-technology teaching programs.64 This comes at a time when U.S. research universities face budget cuts due to state fiscal problems, new

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61 The list of policies of other countries that have an impact on U.S. competitiveness includes “currency manipulation and dollar overvaluation, value added taxes and their rebates on exports, mercantilism, “buy national” policies and practices, anti-trust and competition policies, enforcement of global trade rules, financial subsidies aimed at luring the outsourcing of production and technology development abroad, and indigenous technology preferences.” See Clyde Prestowitz, “Competitiveness Council wide of its mark,” Foreign Policy, December 16, 2011. For a compilation of foreign trade barriers by country and quantitative estimates of the impact of these foreign practices on the value of U.S. exports, see National Trade Estimates, Office of the U.S. Trade Representative, Access at http://www.ustr.gov/about-us/press-office/reports-and-publications/2010.

62 See Matthew J. Slaughter, How Piracy in China Costs U.S. Jobs, Tuck School of Business at Dartmouth and NBER, September 2010.

63 See the related discussion on “Developing 21st Century Universities” in Chapter 2 of this report.

64 Taiwan plans to invest $1.7 billion over five years to develop world-class universities. India’s current five-year plan calls for 1,500 new universities, three new Indian Institutes of Science Education and Research, and seven new Indian Institutes of Technology. The Flemish government launched a €232 million program in 2006 to boost basic research at universities. China’s $4.5 billion 985 programs seeks to make 39 universities among the best in the world. Canada has invested $5.2 billion since 1997 in 130 research institutions, while its $300 million Canada Research Chairs program has established 2,000 chairs headed by top-flight academics.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     challenges, and new missions in regional development and technology commercialization.65

f. Providing Early Stage Finance:66 Other nations are adopting programs often modeled after U.S. programs in order to help promising technology companies survive the gap in funding that frequently occurs between inventing a product and bringing it to market. 67 The U.S. has only recently launched new efforts in this area such as Start-up America to address the need of start-ups for capital and expertise.68 Proven U.S. programs have faced challenges: SBIR has just emerged from a long and difficult reauthorization. Despite its considerable accomplishment, NIST’s Technology Innovation Program is currently without funding.69 And notwithstanding the recent the efforts to address the early stage funding in biomedicine, funding for translational research at NIH remains a challenge.70

g. Attracting Global Talent:71 While strong U.S. investments in research and universities have traditionally enabled it to draw and

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65 See Paul Courant, James Duderstadt, and Edie Goldenberg, “Needed: A National Strategy to Preserve Public Universities,” The Chronicle of Higher Education, Jan. 3, 2010 (http://milproj.dc.umich.edu/pdfs/2010/2010-Chronicle-Commentary.pdf). See also National Research Council, Breaking Through: Ten Strategic Actions to Leverage Our Research Universities for the Future of America, Washington, DC: The National Academies Press, 2012.

66 See the related discussion on “Providing Early Stage Finance” in Chapter 2 of this report.

67 For example, Japan established a Small Business Innovation Research program modeled after that of the U.S. India’s Small Business Innovation Research Initiative, launched in 2007, supports highrisk R&D projects by biotech start-ups. The Netherlands introduced its SBIR program in 2004. The United Kingdom established the Small Business Research Initiative in 2001. Finland’s Tekes invested €343 million ($494 million) directly in enterprises, most of them with fewer than 500 employees, to develop technologies in partnership with universities.

68 Under the Start-up American initiative, the Small Business Administration will commit to a $1 Billion Impact Investment Fund that invests growth capital in companies located in underserved communities. It will also commit to a $1 Billion Early-Stage Innovation Fund that provides a 1:1 match to private capital raised by seed and early stage funds. See http://www.sba.gov/startupamerica.

69 The Technology Innovation Program (TIP) at the National Institute for Standards and Technology “supports, promotes, and accelerates innovation in the United States through high-risk, high-reward research in areas of critical national need” through “targeted investments in transformational R&D that will ensure our nation’s future through sustained technological leadership.” See http://www.nist.gov/tip/. TIP succeeds the Advanced Technology Program, which was assessed by a committee of the National Academies to be “an effective federal partnership program.” See National Research Council, The Advanced Technology Program, Assessing Outcomes, C. Wessner, ed., Washington, DC: National Academy Press, 2001.

70 There have been new initiatives to address the need for translational research. The NIH leadership has proposed a new National Center for Advancing Translational Sciences, currently funded at $575 million, against an overall NIH budget of $32 billion. See NIH News, “NIH establishes National Center for Advancing Translational Sciences,” December 23, 2011. Access at http://www.nih.gov/news/health/dec2011/od-23.htm.

71 See the related discussion on “Hunting for Global Talent” in Chapter 2 of this report.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     retain top global talent, other governments are intensifying efforts to attract accomplished science and technology talent back home and to recruit star scientists from around the world.72 The relative loss of global talent is reinforced as foreign-born U.S. graduates and foreign-born entrepreneurs face greater difficulty obtaining U.S. work visas, residency, and citizenship.73

h. Focusing on Building Innovation Clusters and Science Parks:74 Governments around the world have recognized the powerful competitive advantages of strong regional innovation clusters and are investing aggressively in developing science parks75 as part of comprehensive strategies to foster innovative clusters.76 In the United States, until recently, there has tended to be little alignment between federal economic-development programs and state and

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72 Since launching an aggressive campaign to lure top foreign talent a decade ago, Canada has recruited more than 3,000 foreign researchers and more than 600 university department chairs. Among the elite international scientists recruited by Singapore’s A*Star agency are senior researchers from The National Cancer Institute, MIT, and the University of Texas at Austin. Under China’s Thousand Talents Program, launched in 2008, top Chinese scientists working abroad are offered grants of 1 million Yuan, world-class salaries, and generous lab funding if they return to China.

73 The Obama Administration has taken a number of new initiatives in this area. On Aug. 2, 2011, for example, the Administration announced that foreign entrepreneurs may obtain EB-2 employment visas set aside for immigrants with advanced degrees and skills and qualify for H-1B visas as selfemployed entrepreneurs. Procedures for obtaining EB-5 visas for immigrant investors were streamlined. Department of Homeland Security and U.S. Citizenship and Immigration Service press release, Aug. 2, 2011. These are very positive steps designed to attract and retain foreign talent.

74 For an expanded discussion of initiatives around the world to develop clusters and science parks, see Chapter 7 of the report.

75 The level of Chinese central and regional government investment, and the number of parks and their scale, are most impressive. The vast majority of U.S. parks are on a much smaller scale and benefit from much smaller levels of public investment. Only Research Triangle Park approximates the scale of the Chinese efforts. See Rick Weddle, “Research Triangle Park: Past Success and the Global Challenge,” in National Research Council, Understanding Research, Science and Technology Parks, C. Wessner, ed., Washington, DC: The National Academies Press, 2009, p. 26. It is important to keep in mind that the parks can have substantially different objectives; some are focused on research, some on industrial development, but many combine technology development and industrial applications and can also support national missions, as does the Sandia Science and Technology Park. See http://www.sstp.org/index.html.

76 Examples include the French Pôle de Croissance program, the Chinese drive to build large research parks, and the new Russian Skolkovo innovation hubs. For a review of national strategies in France, China, and elsewhere to develop research parks, see National Research Council, Understanding Research, Science and Technology Parks: Global Best Practices, op. cit. For a review of the role of public policy in fostering innovation clusters, see National Research Council, Growing Innovation Clusters for American Prosperity, C. Wessner, rapporteur, Washington, DC: The National Academies Press, 2011. With regard to Russian efforts, the Financial Times reports “the Kremlin is working hard to position Skolkovo as a hallmark of its modernization program and a key part of its strategy to diversify away from oil and gas.” The innovation hub has been promised $3 billion in government funding over the next three years. In addition, the project is seeking an equal amount from private groups. See Financial Times, “Welcome to Russia’s Silicon Valley.” August 21, 2011.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     local innovation cluster initiatives. Recent initiatives by the current administration are steps in the right direction; the question is whether the number of clusters receiving support and their funding levels are sufficient.77

5. U.S. leadership in innovation is eroding.78 First, the preeminence of the United States is diminishing in terms of research inputs, from the number of science and technology personnel, to federal research funding, and the number of patents filed and scientific papers produced.79 Second, America’s position as the world’s pre-eminent ecosystem for turning new technologies into commercial products is also declining relative to both new entrants and established competitors. In part, the U.S. position is less secure as the result of the growing commitments by the rest of the world not only to education and research but also to the commercialization of new technologies. Finally, as emerging nations increase their support for R&D and innovation and insist on commitments to their innovation systems, U.S. companies are performing more of their R&D in those countries.80

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77 The U.S. Departments of Energy, Commerce, Defense, Agriculture, Labor and Education now all have cluster-development programs and coordinate activities on specific regional initiatives. See presentation by Ginger Lew, then of the White House National Economic Council at the National Academies conference on Clustering for Prosperity, Washington, DC, February 23, 2010.

78 See the related discussion of “New Trends in Global Innovation” in Chapter 1 of this report.

79 National Academy of Sciences, National Academy of Engineering, and the Institute of Medicine, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic future, Washington, DC: The National Academies Press, 2007. Also see National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, Rising Above the Gathering Storm, Revisited: Rapidly Approach Category 5, Washington, DC: The National Academies Press, 2010.

80 According to the NSB, “the geographic distribution of R&D by overseas affiliates of U.S. MNCs is gradually reflecting the role of emerging markets in global R&D.” The share of major developed economies or regions (Canada, Europe, and Japan) “accounted for a decreasing share of the overseas R&D investments of U.S. MNCs, declining from 90% in 1994 to 80% in 2006.” At the same time, R&D performed by U.S.-owned affiliates in China and India “increased from less than $10 million in each country in 1994 to $804 million in China and $310 million in India in 2006.” National Science Board, Science and Engineering Indications 2010, Chapter 4. Accessed at http://www.nsf.gov/statistics/seind10/c4/c4s6.htm#s2. For a survey of factors driving multinational R&D location, see Jerry Thursby and Marie Thursby, Here or There? — Report to the GovernmentUniversity-Industry Research Roundtable, Washington, DC: The National Academies Press, 2006. For a recent analysis of the evolution of R&D by multinationals in China, see Robert Pearce, ed., China and the Multinationals, International Business and the Entry of China into the Global Economy, Aldershot: Edward Elgar Publishing, 2011. The book documents how leading multinationals have drawn their operations in China into their established operations and suggests that the operations of multinationals are “increasingly embedded in the growth and sustainability of the Chinese economy itself, rather than merely serving as a supply base for their global markets.”

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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a. The Emergence of Major Global Competitors81: The U.S. is facing major competition from the policies and markets of rising global powers. By tapping into global knowledge and integrating themselves more into to the global economy, emerging nations, like China, India, and South Korea have rapidly become major global players, albeit in different ways.82 These fast growing economies have critical masses of highly educated people and of scientists and engineers, now matched by rapidly growing expenditures on R&D [See Figure 3.4], as well as large, and in some cases, largely protected domestic markets. They are seeking to perform R&D for multinational companies with the learning that this entails,83 to deploy this potential to meet their own needs, and to expand their production for export markets.

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81Chapter 5 of this report highlights policies and programs to spur innovation based competitiveness undertaken by leading nations, including China, India, and Germany.

82 Carl Dahlman, The World Under Pressure: How China and India Are Influencing the Global Economy and Environment, Palo Alto: Stanford Economics and Finance, 2011. See also Carl Dahlman, “China and India: Emerging Technological Powers.” in Issues in Science and Technology, Spring 2007. See also Alice Amsden, Asia’s Next Giant: South Korea and Late Industrialization, Oxford: Oxford University Press, 1989, Alice Amsden, Beyond Late Development: Taiwan’s Upgrading Policies, Cambridge: MIT Press, 2003, and AnnaLee Saxenian, The New Argonauts: Regional Advantage in a Global Economy, Cambridge: Harvard University Press, 2006.

83 For a review of India’s accomplishments as well as challenges in innovation, See National Research Council, India’s Changing Innovation System, C. Wessner and S. Shivakumar, eds., Washington, DC: The National Academies Press, 2007. See also World Bank, “Unleashing India’s Innovation” Mark A. Dutz, ed., Washington, DC: World Bank, 2007. For a review of recent product and business innovation by Indian pioneers, see R.A. Mashelkar and C. K. Prahalad, “Innovation’s Holy Grail,” Harvard Business Review, July 2010. See Dan Breznitz, Michael Murphree, Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China, New Haven: Yale University Press, 2011. The authors examine the strengths and weaknesses of the Chinese innovation system, noting that China’s sustained economic vitality does not appear to depend on generating cutting edge innovation. See also National Research Council, Building the 21st Century, U.S. China Cooperation in Science, Technology, and Innovation, C. Wessner, rapporteur, Washington, DC: The National Academies Press, 2011. Finally, Mu Rongping of the Chinese Academy of Sciences provides a summary of his nation’s innovation accomplishments and challenges in the 2010 UNESCO Science Report. See United Nations Educational, Scientific and Cultural Organization, UNESCO Science Report 2010, Paris: UNESCO Publishing, 2010, Chapters 17, 18 and 20.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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FIGURE 3.4 China, Korea and India increased their share of world spending on R&D from 9.4% to 14.7% from 2002 to 2007.
SOURCE: UNESCO, UNESCO Science Report 2010 (UNESCO Publishing, Paris, 2010).

b. Growth of Innovative Regions around the World84: Innovation hubs like Silicon Valley, greater Boston, San Diego, Austin, and Seattle have for decades been magnets for the world’s brightest and most visionary innovators, technology entrepreneurs, and financiers. Now these hubs face greater competition as places to commercialize new technology and launch new companies. Taipei, Shanghai, Helsinki, Tel Aviv, Bangalore, Hyderabad, Singapore, Sydney, and Suwon,85 are among the many cities that now boast

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84 Chapter 7 highlights national and regional programs to develop innovation clusters around the world.

85 Home to a large Samsung Electronics factory, Suwon, South Korea is a major educational center that is home to 14 university campuses. For a review of the impact of Korean innovation clusters, including Suwon, see Doohee Lee, “Regional Innovation Activity: The Role of Regional Innovation Systems in Korea.” KIET Occasional Paper No. 78, February 2010.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     high concentrations of technology entrepreneurs and are increasingly able to launch innovative companies.86

c. Growth of Offshore Research Centers:87 American multinational corporations in sectors ranging from pharmaceuticals to software have, in recent years, set up advanced R&D centers in countries such as India, China, and Russia.88 This trend was made possible by the liberalization of state controls in these countries, and driven at least initially by the availability of skilled graduates, and lower costs and the need to deploy and adapt products suited to these large, rapidly growing markets.89 While these R&D centers develop and adapt technologies to domestic markets of the countries where they are located, they also plan to develop products for the global market. Increasingly, these centers are a part of the integrated innovation system of global enterprises including GE, IBM, Intel, 3M, and Microsoft that connects company research across borders.90

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86 According to a map of global innovation clusters by the McKinsey Global Institute and World Economic Forum, some U.S. cities are losing ground to these and other emerging “hot springs” of innovation in Asia and Europe. See Juan Alcacer and McKinsey & Co., “Mapping Innovation Clusters,” McKinsey Digital, March 19, 2009, (http://whatmatters.mckinseydigital.com/flash/innovation_clusters/). Also see Andre Andonian, Christoph Loos, and Luiz Pires, “Building an Innovation Nation,” McKinsey & Co., March 4, 2009.

87 See also the discussion in Chapter 1 on the “Growth of Foreign Research Centers of U.S. Multinationals.”

88 For a review of the drivers and impacts of the growth of advanced R&D centers in emerging economies, see OECD, Science, Technology and Industry Outlook, Chapter 4 “The internationalisation of R&D”, Paris: OECD, 2006. See also Pete Engardio, Aaron Bernstein, and Manjeet Kripalani, “The New Global Job Shift” BusinessWeek, February 3, 2003 and UNCTAD, Globalization of R&D and Developing Countries, New York: United Nations, 2005.

89 Ashok Deo Bardhan, and Dwight M. Jaffee, “Innovation, R&D and Off-shoring,” University of California at Berkeley: Fisher Center Research Reports, 2005.

90 For example, GE has recently moved its X-ray business headquarters from Wisconsin to China. Wall Street Journal, “GE Bases X-Ray Unit in China,” July 26, 2011. For a perspective from IBM on the globalization of its research and development operations, see Mark Dean, “ICT development in U.S. and Chinese Contexts”, in National Research Council, Building the 21st Century, U.S. China Cooperation in Science, Technology, and Innovation, op cit. See also Gert Bruche, “A new geography of innovation – China and India rising,” in Karl P. Sauvant et al. (eds.) FDI Perspectives: Issues in International Investment, New York: Vale Columbia Center on Sustainable International Investment (January 2011). Bruche notes that while” the dominant share of MNE R&D in China and India comprises routine activities adapting existing designs or processes, or providing modular contributions transformed into innovative products and processes in the triad’s higher order R&D centers … scattered evidence points to fast learning and upgrading processes resulting in ever more centers and CROs taking on selective regional or global roles as centers of excellence within MNEs global innovation networks.” According to Roland Berger, for example, 3M corporation has R&D locations in 30 countries supported by a central research center at corporate headquarters in St. Paul. Robert Ohmayer, “Globalization of R&D: Drivers and Success Factors,” Roland Berger Strategy Consultants, April 19, 2007.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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6. Capturing the Benefits of Investments in R&D:91 A key challenge for the United States is to capture an important part of the economic benefits of its substantial investments in basic research in an era when other countries are adopting policies and programs focused on translating nationally and globally sourced research into domestic production of new products for the market.92

a. Research as a Global Public Good: Other nations have intensified their efforts to capture the economic value of the world’s research efforts, including those financed by U.S. taxpayers. Although the U. S. federal government remains the world’s largest sponsor of basic research, and total federal R&D spending reached $148 billion in FY 2010, traditional trading partners and emerging nations alike are more focused than the U.S. in seeking to capture the economic value of these tremendous public investments by channeling their efforts on translating new technology into commercial applications and job-generating industries. 93 Research, especially basic research, is widely recognized as a public good. The full economic value of basic research is unlikely to accrue to private investors, hence the rationale for government support for research.94 In the new world order of rapid, open global knowledge flows, the gap between federally funded research and U.S. based commercialization means that it is possible for foreign enterprises (often with state support) to capitalize on U.S. investments in basic research. Many countries have focused on commercializing innovations within their national borders, with the goal of creating large-scale industries and high value employment.95 This is an important paradigm shift. Whereas the commercialization of research funded by the U.S. in

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91 See the related discussion, “Capturing the Economic Value of Innovation” in Chapter 1 of this report.

92 Gary P. Pisano and Willy C. Shih in “Restoring American competitiveness,” Harvard Business Review 87, Nos. 7-8, (July-August 2009). Some in the U.S. believe that it is inappropriate for government to support and/or encourage downstream development of commercial products. Whatever the merits of this view, most big U.S. trading partners do not share it.

93 New growth theory models show that R&D spillovers are a major source of endogenous growth. See Zvi Griliches, “The Search for R&D Spillovers,” The Scandinavian Journal of Economics, Vol. 94, 1992 Supplement, pp. 29-47. Coe and Helpman add that the tendency of research to spillover means that R&D investments by other countries can have substantial beneficial effects on domestic factor productivity. David T. Coe and Elhanan Helpman, “International R&D spillovers,” European Economic Review, Volume 39, Issue 5, May 1995, pp. 859-887.

94 See Ben S. Bernanke, “Promoting Research and Development: The Government’s Role” Issues in Science and Technology, Volume XXVII, Number 4, Summer 2011.

95 Carl Dahlman, The World Under Pressure: How China and India Are Influencing the Global Economy and Environment, Palo Alto: Stanford Economics and Finance, 2011.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     the postwar era took place mostly in the United States, the globalization of innovative capacity in the 21st Century means that ideas developed in the United States can now be more easily developed and commercialized overseas.96

b. The Need for a Strategic Approach:97 Most of America’s major trading partners do not leave the development of their economies solely to the workings of the market. They take a more strategic approach and many are expanding programs and policies aimed at advancing promising technologies and large-scale domestic manufacturing in areas such as electric-drive vehicles, renewable energy equipment, and solid-state lighting in order to secure global competitive advantage, gain or maintain national competency in production, and to keep or create high-quality jobs.98 Not all of these programs succeed; sometimes they fail or need readjustment. This willingness to readjust and reinvest is fundamental. The United States takes the same approach with U.S. defense or space efforts, where failure elicits renewed efforts. The United States is one of the few industrial nations that have, until recently, tended not to adopt a strategic approach regarding the composition of its economy, although particular sectors with political influence receive substantial support.99 To some extent, this has not mattered until now due to the momentum gained from past public and

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96 Joseph Stiglitz, “Knowledge as a Global Public Good,” in I. Kaul, I. Grunberg and M. Stern, eds. International Cooperation in the 21st Century, New York: UNDP, 1999. See also Charlotte Hess and Elinor Ostrom eds., Understanding Knowledge as a Commons, Cambridge: MIT Press, 2007.

97 For a review of how some leading economies are addressing their innovation and growth challenges, see Chapter 5 of this report. For a review of national support for emerging industries, see Chapter 6 of this report.

98 China’s most recent Five-Year plan calls for major government investments in seven strategic industries, including biotechnology, alternative energy, and next-generation information technology. For details on Germany’s long-term plans to advance transportation-related industries, see German Federal Government’s National Electromobility Development Plan, August 2009, and for its information and communications technology strategy, see Federal Ministry of Education and Research, ICT Strategy of the German Federal Government: Digital Germany 2015, November 2010. Among South Korea’s initiatives targeting specific industries are its plan to invest $12.5 billion over 10 years to become the world’s dominant producer of advanced batteries. See Yonhap News Agency, “S. Korea Aims to Become Dominant Producer of Rechargeable Batteries in 2020,” July 11, 2010.

99 To some extent, these initiatives are now being emulated in the U.S. To ensure that the U.S. has a domestic manufacturing base for advanced batteries, the federal government in 2009 awarded $2.4 billion in grants under the American Recovery and Reinvestment Act to manufacturers of lithiumion cells, battery packs, and materials. These grants complemented the $25 billion in debt capital made available by the federal government to encourage automakers to produce more energy-efficient cars under the Advanced Technology Vehicles Manufacturing (ATVM) Loan Program. The state of Michigan has also made significant investments to develop an electrified-vehicle industrial cluster. The state offered more than $1 billion in grants and tax credits to manufacturers of lithium-ion battery cells, packs, and components. See chapter 6 on National Support for Emerging Industries in this volume.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     private investments.100 But as the emerging economies have become richer and more advanced economically, they have moved up the value-added chain, increasingly producing “the kind of high-value-added components that 30 years ago were the exclusive purview of advanced economies.”101 This has created economic pressures in the developed economies to more rapidly move into technology-intensive manufacturing industries and knowledge intensive service industries.

c. An Institutionalized Focus on Translational Research and Applications:102 Taiwan, Germany, Finland, China, South Korea and other regions and nations have major institutions focused on applied and translational research aimed at enabling domestic companies to develop manufacturing processes and marketable products. Large, well-funded public-private partnerships such as Germany’s Fraunhofer-Gesellschaft, Taiwan’s Industrial Technology Research Institute, Korea’s Electronics and Telecommunications Research Institute, and Finland’s Tekes have proven remarkably successful at helping domestic manufacturers translate new technologies into products and production processes and remain globally competitive despite high or rising labor costs.103 The U.S. has no equivalent to these large applied research institutions that collaborate with industry to capitalize on national investments in research to develop technology and commercial products that are produced domestically at large-scale.

d. A Focus on Manufacturing:104 Major U.S. trading partners understand that a domestic industrial base that can produce advanced products in high volumes, and the high skilled jobs that this productive activity generates, is integral to maintaining global competitiveness in innovation and increases chances of leading in

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100 “Cheaper information technology has given greater importance to more productive forms of capital. The rising contribution of investments in information technology since 1995 has been a key contributor to the U.S. growth resurgence and has boosted growth by close to a percentage point.” See National Research Council, Enhancing Productivity Growth in the Information Age, D. Jorgenson and C. Wessner, eds., Washington, DC: The National Academies Press, 2007, page 21.

101 Michael Spence, “Globalization and Unemployment: The Downside of Integrating Markets,” Foreign Affairs (July/August 2011).

102 See the related discussion on “Institutional Support for Applied Research” in Chapter 2 of this report. See also a summary description of the Fraunhofer-Gesellschaft in Chapter 5 of the report.

103 Germany’s Fraunhofer-Gesellschaft has more than 80 research units, including 60 Fraunhofer Institutes, with a $2.2 billion annual budget to help Germany manufacturers launch new products and manufacturing processes in 16 industrial clusters. Taiwan’s Industrial Technology Research Institute has 6,000 staff that collaborates with manufacturers in emerging industries such as flexible displays, sold-state lighting, photovoltaic cells, and MEMs devices. South Korea’s Electronics and Telecommunications Research Institute has 1,700 researchers with doctoral and master’s degrees helping industries such as semiconductors, digital mobile communications, and fuel cells.

104 See the related discussion on “Strengthening Manufacturing,” in Chapter 2 of this report.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     next-generation technologies.105 Therefore, many nations and regions support their manufacturing sectors with tax holidays, grants, and credit.106 They also support domestic manufacturing through trade policy measures and government procurement107 and programs designed to stimulate large domestic demand in key industries,108 as well as well-financed institutes to facilitate adoption and importation of new technologies for large and small firms alike.109

In the past, the U.S. has successfully driven technology down the cost curve and up the learning curve with defense procurement.110

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105 Suzanne Berger, “Why Manufacturing Matters,” MIT Technology Review, July 1, 2011. Access at http://www.technologyreview.com/business/37932/. The Indian Government’s recently announced policies for ICTE industries highlights the requirement for a “concerted effort to boost manufacturing activity … as robust economic growth in the country is leading to extraordinarily high demand for electronic products in general and telecom products in particular.” Government of India, “A Triad of Policies to Drive a National Agenda for ICTE,” (October 10, 2011). Accessed at http://www.dot.gov.in/NTP-2011/final-10.10.2011.pdf.

106 For example, China, Malaysia, Singapore, and other nations offer 10-year tax holidays to foreign companies building factories or R&D centers in targeted industries. To convince AMD to build a silicon wafer plant in Germany in 2004, federal and state governments provided $798 million in cash and allowances, guaranteed 80 percent of the value of bank loans, and covered the total product cost of the plant. The Israeli government offered more than $1 billion in aid, including a $525 million to grant, for Intel’s 300 mm plant in Kiryat Gat and $660 million in tax benefits to upgrade another plant. Many U.S. states have similar policies, as with Michigan’s focus on electric cars and New York’s nano initiative in Albany, but often they lack scope, consistency, and/or an overall strategy. The State Science and Technology Institute (SSTI) lists the leading technology based economic development programs of U.S. states and regions.

107Perhaps the most explicit use of government policy to support domestic manufacturers are China’s “indigenous innovation” regulations, which mandate that purchases of high-tech goods using government funds favor Chinese-owned companies that own the intellectual property rights to the products. see James McGregor, “China’s Drive for ‘Indigenous Innovation: A Web of Industrial Policies, U.S. Chamber of Commerce, Global Intellectual Property Center, APCO Worldwide (http://www.uschamber.com/sites/default/files/reports/100728chinareport_0.pdf). Also see U.S. International Trade Commission, China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy, Investigation No. 332514, USITC Publication 4199 (amended), November 2010, (http://www.usitc.gov/publications/332/pub4199.pdf) and Alan Wm. Wolff, “China’s Indigenous Innovation Policy,” testimony before the U.S. China Economic and Security Review Commission, Washington, DC, May 4, 2011.

108 Germany, Spain, and other nations encouraged large domestic industries in photovoltaic cells and modules, for example, through feed-in tariff systems that compel utilities to purchase solar power at high rates. See Thilo Grau, Molin Huo, and Karsten Neuhoff, Survey of Photovoltaic Industry and Policy in Germany and China, Climate Policy Initiative Report, DIW Berlin and Tsinghua University, March 2011. France and China are using government purchases as one way of promoting large-scale production of hybrid and electric-drive vehicles.

109 These would include, for example, the Fraunhofer-Gesellschaft in Germany, the Industrial Technology Research Institute in Taiwan, and the Korea Institute of Industrial Technology in South Korea., and on a smaller scale, the Industrial Research Assistance Program in Canada.

110 To cite one example, military purchases of integrated circuits were critical to establishment of America’s semiconductor industry in the 1960s and 1970s. See Kenneth Flamm, Mismanaged Trade? Strategic Policy and the Semiconductor Industry, Washington, DC, Brookings Institution, 1996. pp. 27-38. See also William B. Bonvillian and Richard Van Atta, “ARPA-E and DARPA: Applying the DARPA Model to Energy Innovation,” Journal of Technology Transfer 36 (2011): 469-513. At the state level, California has imposed mandates for fuel economy (leading to increased demand for hybrids) and reduced the use of incandescent bulbs with various regulations.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     More recently, the federal government has tended to leave this competition for manufacturing capacity to the states. Some of these efforts have recorded significant success.111 In other cases, federal initiatives have reinforced state-based programs, such as in Michigan, where the federally funded battery initiative has helped re-shore U.S. production of advanced batteries.112 Nonetheless, the recent deterioration in the U.S. trade balance in advanced technology products is a troubling indication that the U.S. hightechnology manufacturing base is losing ground relative to other global competitors.113 [See 3.5] And there is growing and authoritative concern that the continued erosion of America’s hightech manufacturing base threatens to undermine U.S. leadership in next-generation technologies114, while at the same time failing to produce the high value-added employment gains that would follow expanded U.S. high technology exports. Moreover, some analysts argue that with respect to maintaining manufacturing competitiveness and the associated skilled labor and technical institutions, activity that is lost is difficult to recover. They therefore argue that it is important for policy makers to be

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111 As noted, New York State’s initiative to support semiconductor manufacturing and other nanoscale industries has achieved significant impact in terms of jobs, growth, and competency. See chapter 7 on Regional Innovation Clusters in this volume and Everett M. Ehrlich, A Study of the Economic Impact of GLOBALFOUNDRIES, June 2011.

112 Michigan has succeeded in developing one of the world’s largest clusters of advanced batteryrelated manufacturers. See Chapter 7 on Regional Innovation Clusters in this volume. Whether the demand will be adequate to support these investments remains to be seen.

113 Advanced technology products defined by the U.S. Census Bureau categorizes U.S. international trade into 10 major technology areas: advanced materials, aerospace, biotechnology, electronics, flexible manufacturing, information and communications, life science, optoelectronics, nuclear technology, and weapons. U.S. Census Bureau, Foreign Trade, Country and Product Trade, Advanced Technology Products. Because the value of trade in the final product is credited to the country where the product was substantially transformed, data for products produced with components from multiple countries are imperfect. To the extent that U.S. imports of advanced technology products contain components manufactured in the United States and previously exported (microprocessors, for example) the import value will overstate the actual foreign value-added.

114 This concern has been shared by the PCAST in both the Bush and Obama Administrations. See President’s Council of Advisors on Science and Technology, Report to the President on Ensuring American Leadership in Advanced Manufacturing, Executive Office of the President, June 2011. Also see President’s Council of Advisors on Science and Technology, “Sustaining the Nation’s Innovation Ecosystems: Information Technology Manufacturing and Competitiveness,” January 2004. In addition see Gregory Tassey, “Rationales and mechanisms for revitalizing US manufacturing R&D strategies,” Journal of Technology Transfer, DOI 10.1007/s10961-009-9150-2, 2010. (http://www.choosetocompete.org/downloads/PCAST_2004.pdf).

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     concerned with the composition of the economy. “One implication is that long-term policy frameworks should include an evolving assessment of competitive strength and employment potential across sectors and at all levels of the human capital and education spectrum, and a goal of steering or nudging market outcomes to achieve the social objectives. The structural evolution of the economy matters and can be influenced in relatively efficient ways.”115

e. Trade and Innovation are Closely Linked: Trade and investment measures cannot be ignored when examining the location of innovation – from invention to commercialization. Providing a market induces not only original research, but the ability to achieve scale. Open markets foster innovation, although there is a strong school of thought in a number of countries abroad that protection is a more promising tool. For this reason, the “indigenous innovation” policies of China often have taken the form of local content requirement placed on foreign investors and purchasers of goods in China.116 Open markets, the U.S. policy, can be detrimental to an import-competing industry if another country’s industrial policies have created distortions in trade and investment patterns, which can lead to subsidized production and “dumping” of products in foreign markets.117

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115 Michael Spence and Sandile Hlatshwayo, “The Evolving Structure of the American Economy and the Employment Challenge,” Council on Foreign Relations, Working Paper, March 2011, p. 37.

116 For additional discussion of mercantilist policies, see the section on “21st Century Mercantilism” in Chapter 1. Chapter 5 provides a further description of China’s trade and innovation policies.

117 HIER, KEIL and NRC, Conflict and Cooperation in National Competition for High Technology Industry, Washington, DC: National Academy Press, 1996. For an illustrative study, see Thomas Howell, Steel and the State; Government Intervention and Steel’s Structural Crisis, New York: Westview Press, 1988.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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image

FIGURE 3.5 U.S. trade balance in advanced technology products from 1989 to 2011.
SOURCE: U.S. Census Bureau, Foreign Trade, Trade in Goods with Advanced Technology Products.

7. Opportunities for Cooperation:118 The focus and investments of other nations to accelerate innovation activity opens genuine opportunities for enhancing cooperation on today’s global challenges concerning the environment, energy, and health. The globalization of research and innovation presents valuable opportunities for U.S. firms and federally funded research institutes to capitalize on offshore R&D initiatives and growing pools of science and technology talent.119 Yet the United States

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118 See the related discussion on “The Way Forward,” including the need to monitor developments and cooperate globally, in Chapter 2 of this report.

119 “The 20th-century national S&T innovation environment that has been a hallmark of the United States since World War II, and the model for the world, is evolving into a new 21st-century global S&T innovation environment in which R&D talent, financial resources, and manufacturing facilitated by global communications are geographically dispersed and globally sourced.” National Academy of Sciences, S&T Strategies of Six Countries, op. cit., p. 93.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     currently invests little to stay abreast of foreign science and innovation policies, and the opportunities they present for cooperation.

a. New Opportunities and Common Challenges: The rapid growth of R&D activities and research workforces in emerging powerhouses such as India, China, and Brazil—as well as improvements in Internet infrastructure—present greater opportunities for the U.S. to accelerate development of technologies and address common challenges through global partnerships.120 The innovation strategies of major trading partners place a high priority on expanding international cooperation to accelerate development of technologies and to meet common global needs such as clean energy and cures for disease.121 This is because our partners recognize that we face common challenges and because they hope to benefit from pooling assets. At the same time, potentially beneficial international cooperation can be challenging. Matching resources and objectives, while equitably sharing the results, is often difficult.122

b. Greater Outreach: It is also true that many recognize that the United States has committed substantial resources to develop technologies to the point where they can be—with substantial additional resources—developed into marketable products. Research organizations of other nations and regions have established an extensive R&D presence in the U.S. universities to keep abreast of new technologies123 and U.S. corporations have established extensive offshore innovation networks.124 U.S.

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120 For a review of opportunities as well as challenges for closer U.S. – China cooperation on research and innovation, see National Research Council, Building the 21st Century, U.S. China Cooperation in Science, Technology, and Innovation, op. cit. Wagner, Cote and Archambault suggest that the new global innovation environment can benefit the United States if it take advantage of “the distributed knowledge base emerging in science and technology.” Caroline S. Wagner, Gregoire Cote and Eric Archambault, “The Shifting Landscape of Global Science: A Challenge for United States Policy,” pre-publication version available at http://www.carolinewagner.org/index.php?option=com_content&view=article&id=107.

121 The national innovation strategies of China, Germany, and India, among others, all call for greater international research collaboration.

122 Hamburg Institute for Economic Research, Kiel Institute for World Economics, and National Research Council, Conflict and Cooperation in National Competition for High Technology Industry, Washington, DC: National Academy Press, 1996.

123 Taiwan’s ITRI, for example, has joint research programs with MIT, the University of California at Berkeley, Carnegie Mellon University, and Stanford Research Institute. Germany’s Fraunhofer has seven research institutes based at U.S. universities, including Michigan State University, Boston University, Massachusetts Institute of Technology, the University of Maryland, the University of Michigan, Johns Hopkins University, and the University of Delaware.

124 Some 249 of America’s top 500 corporations have overseas R&D facilities, with China and India the most numerous destinations. Jadeep C. Prabju, Andreas B. Eisengerich, Rajesh K. Chandy, and Gerard J. Tellis, “ Patterns in the Global Location of R&D Centres by the World’s Largest Firms: The Role of India and China,” paper presented at Druid Summer Conference 2010, Imperial College London Business School, June 16-18, 2010. IBM, Microsoft, General Electric, Pfizer, and other U.S. corporations all perform R&D in India and China for products sold around the world. See Chapter 5 analyses of MNC innovation in India and China in this volume.

Suggested Citation:"Chapter 3 Findings." National Research Council. 2012. Rising to the Challenge: U.S. Innovation Policy for the Global Economy. Washington, DC: The National Academies Press. doi: 10.17226/13386.
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     government agencies and national laboratories, however, have a relatively small offshore presence that limits their ability to learn from other nations, but could do so.125

c. The Internet and Cross-Border Data Flows: The Internet and information and communications technologies (ICT) are at the forefront of developments changing the way business is done internationally. The Internet and ICT have also transformed the way R&D activities are performed by “enabling distributed research, grid and cloud computing, simulation, or virtual worlds.”126 The Internet, because of its global nature, is accelerating the “pace and scope of research and innovation, and encouraging new kinds of entrepreneurial activity.”127 Networked information systems and data flows have become a core component of 21st century innovation. It is important that international consensus be achieved on maintaining the free and open flow of legitimate data and knowledge across borders so that the benefits of the Internet and ICT on world growth and innovation can be preserved and expanded.

d. Greater Awareness: The massive investments in innovation capacity and ambitious policy initiatives underway around the world will have an impact on the United States in ways that can scarcely be imagined today. It can be certain, however, that the impact will be immense. Not all of these strategies will work, yet some are likely to transform 21st century global competition, with profound implications for America’s well-being and national security. Yet the United States currently invests little to track foreign technology investments, industrial policies, and proinnovation policies, much less project their implications into the future.

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125 The U.S. military has a limited number of science and technology representatives overseas. For example, the Office of Naval Research operates regional offices in places such as Singapore, Prague, Santiago, and London. In addition, and the staff of many U.S. embassies include officers whose portfolios cover science, but they often have many additional responsibilities such as health and the environment, and few may focus on innovative technologies.

126 OECD, “The Future of the Internet Economy,” Policy Brief, June 2008, p. 4. The Internet has also increased R&D efficiency. Marlo I. Kafouros, “The Impact of the Internet on R&D Efficiency: Theory and Evidence,” Technovation, Volume 26, Issue 7, July 2006.

127 OECD, “The Future of the Internet Economy,” Ibid.

125 The U.S. military has a limited number of science and technology representatives overseas. For example, the Office of Naval Research operates regional offices in places such as Singapore, Prague, Santiago, and London. In addition, and the staff of many U.S. embassies include officers whose portfolios cover science, but they often have many additional responsibilities such as health and the environment, and few may focus on innovative technologies.

126 OECD, “The Future of the Internet Economy,” Policy Brief, June 2008, p. 4. The Internet has also increased R&D efficiency. Marlo I. Kafouros, “The Impact of the Internet on R&D Efficiency: Theory and Evidence,” Technovation, Volume 26, Issue 7, July 2006.

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Rising to the Challenge: U.S. Innovation Policy for the Global Economy Get This Book
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America's position as the source of much of the world's global innovation has been the foundation of its economic vitality and military power in the post-war. No longer is U.S. pre-eminence assured as a place to turn laboratory discoveries into new commercial products, companies, industries, and high-paying jobs. As the pillars of the U.S. innovation system erode through wavering financial and policy support, the rest of the world is racing to improve its capacity to generate new technologies and products, attract and grow existing industries, and build positions in the high technology industries of tomorrow.

Rising to the Challenge: U.S. Innovation Policy for Global Economy emphasizes the importance of sustaining global leadership in the commercialization of innovation which is vital to America's security, its role as a world power, and the welfare of its people. The second decade of the 21st century is witnessing the rise of a global competition that is based on innovative advantage. To this end, both advanced as well as emerging nations are developing and pursuing policies and programs that are in many cases less constrained by ideological limitations on the role of government and the concept of free market economics. The rapid transformation of the global innovation landscape presents tremendous challenges as well as important opportunities for the United States.

This report argues that far more vigorous attention be paid to capturing the outputs of innovation - the commercial products, the industries, and particularly high-quality jobs to restore full employment. America's economic and national security future depends on our succeeding in this endeavor.

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