Chapter 1

The Innovation Challenge

America has faced many kinds of global competiveness challenges in the post-War era. They ranged from Sputnik-era fears of being technologically eclipsed by the Soviet Bloc to waves of imports from Germany, Japan, and East Asian Tigers that shook one industry after another. Through these challenges, one factor changed little: Thanks to its robust innovation ecosystem and high levels of investments in research, America maintained its leadership in innovation as its entrepreneurs launched new products, companies, and industries, and created high-paying jobs.

While America’s innovation system has enabled the nation to weather previous competitive challenges, the nature of global competition has changed in fundamental ways. A number of economies have matured and grown their own innovation systems over the last 15-20 years; many of them actively pursue national policies aimed at rapidly capturing strategic industries and the highvalue employment they bring. This means that in today’s world, the dynamic of moving to newly created industries to sustain our prosperity is less and less sustainable as a strategic option. Efforts need to be made to retain, grow, and reinforce the industries we have as well as those we wish to develop.1

Innovation remains the wellspring of America’s economic growth.2 The challenge for the nation in the new global environment is to

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1 For a detailed review of structural changes in the innovation process in 10 service as well as manufacturing industries, see National Research Council, Innovation in Global Industries: U.S. Firms Competing in a New World, Jeffrey T. Macher and David C. Mowery, Editors, Washington, DC: The National Academies Press, 2008. While many industries and some firms in nearly all industries retain leading-edge capacity in the United States, the book concludes that this is “no reason for complacency about the future outlook. Innovation deserves more emphasis in firm performance measures and more sustained support in public policy.”

2 Leading economists, including Robert Solow, Trevor Swan, Edwin Mansfield, Zvi Grillichs, and Paul Romer have calculated that technological innovations have made powerful and very substantial contributions 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. In a latter article



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Chapter 1 The Innovation Challenge America has faced many kinds of global competiveness challenges in the post-War era. They ranged from Sputnik-era fears of being technologically eclipsed by the Soviet Bloc to waves of imports from Germany, Japan, and East Asian Tigers that shook one industry after another. Through these challenges, one factor changed little: Thanks to its robust innovation ecosystem and high levels of investments in research, America maintained its leadership in innovation as its entrepreneurs launched new products, companies, and industries, and created high-paying jobs. While America’s innovation system has enabled the nation to weather previous competitive challenges, the nature of global competition has changed in fundamental ways. A number of economies have matured and grown their own innovation systems over the last 15-20 years; many of them actively pursue national policies aimed at rapidly capturing strategic industries and the high- value employment they bring. This means that in today’s world, the dynamic of moving to newly created industries to sustain our prosperity is less and less sustainable as a strategic option. Efforts need to be made to retain, grow, and reinforce the industries we have as well as those we wish to develop.1 Innovation remains the wellspring of America’s economic growth.2 The challenge for the nation in the new global environment is to 1 For a detailed review of structural changes in the innovation process in 10 service as well as manufacturing industries, see National Research Council, Innovation in Global Industries: U.S. Firms Competing in a New World, Jeffrey T. Macher and David C. Mowery, Editors, Washington, DC: The National Academies Press, 2008. While many industries and some firms in nearly all industries retain leading-edge capacity in the United States, the book concludes that this is “no reason for complacency about the future outlook. Innovation deserves more emphasis in firm performance measures and more sustained support in public policy.” 2 Leading economists, including Robert Solow, Trevor Swan, Edwin Mansfield, Zvi Grillichs, and Paul Romer have calculated that technological innovations have made powerful and very substantial contributions 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. In a latter article 17

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18 RISING TO THE CHALLENGE continue to benefit from this innovation while also encouraging regional development and much higher levels of employment.3 AMERICA’S INNOVATION CHALLENGES America is a world leader in innovation capacity, according to several rankings.4 While not as pre-eminent as in the decades following World War II, the U.S. still leads the world in research spending and patents. U.S. universities and research laboratories continue to produce technological breakthroughs and spin off dynamic start-ups. U.S. companies still create products and business models that transform entire industries.5 Concern is mounting, however, that America is not capturing enough of value of that innovation in terms of economic growth and employment.6 Solow estimated that technological progress accounted for seven-eighths of the increase in real GNP per man-hour from 1909 to 1949 in the United States. “It is possible to argue that about one-eighth of the total increase is traceable to increased capital per man hour, and the remaining seven-eighths to technical change.” Robert M. Solow, “Technical Change and the Aggregate Production Function,” The Review of Economics and Statistics, 1957, 39 (3): 312-320. Often, as Richard Nelson and others point out, this technological progress has been based on a framework of supporting national policies. See Richard Nelson, Technology, Institutions and Economic Growth, Cambridge MA: Harvard University Press, 2005. In addition, Harvard’s Dale Jorgenson documented that the pervasive use of information technologies, developed through the nation’s investments in semiconductor research and early procurement, have actually pushed upwards the nation’s long term growth trajectory. See Dale W. Jorgenson et al., Productivity: Information Technology and the American Growth Resurgence, Cambridge MA: MIT Press, 2005. 3 The Honolulu Declaration of the November 2011 APEC meeting affirmed the importance of promoting effective, non-discriminatory, and market-driven innovation policy. The agreement text notes that “Encouraging innovation – the process by which individuals and businesses generate and commercialize new ideas – is critical to the current and future prosperity of APEC economies. Our collective economic growth and competitiveness depend on all our peoples' and economies' capacity to innovate. Open and non-discriminatory trade and investment policies that foster competition, promote access to technology, and encourage the creation of innovations and capacity to innovate necessary for growth are critical aspects of any successful innovation strategy.” 4 The World Economic Forum ranks the United States as fifth in innovation capacity. See Center for Global Competitiveness and Performance, “The Global Competitiveness Report: 2011-2012,” World Economic Forum (http://www3.weforum.org/docs/WEF_GCR_Report_2011-12.pdf). Insead’s latest global innovation index ranks the United States seventh, down from number one in 2009. Insead, “The Global Innovation Index 2011,” (http://www.globalinnovationindex.org/gii/GII%20COMPLETE_PRINTWEB.pdf ). 5 While the U.S. still leads the world in R&D spending, the growth of Chinese R&D spending has shifted the share of global R&D spending over the past ten years with China overtaking Japan in 2010. The U.S. accounted for 32.8 percent of global R&D spending in 2010, compared to 24.8 percent for Europe, 12.0 percent for China and 11.8 percent for Japan. Battelle and R&D Magazine, 2012 Global R&D Funding Forecast, December 2011. 6 See Tyler Cowen, The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better. New York: Dutton, 2011. Cowen argues that on the margin, innovation no longer produces as much additional GDP growth as it used to. In part, this may be an issue of not adequately measuring the contributions of modern information and communications in the national accounts. See National Research Council, Enhancing Productivity Growth in the Information Age, D. Jorgenson and C. Wessner, eds., Washington, DC: The National

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THE INNOVATION CHALLENGE 19 Capturing the Economic Value of Innovation This concern is based on the fact that what is innovated in America is increasingly industrialized elsewhere. Even in industries where labor cost is not a deciding factor, the high-paying production and engineering jobs that go with large-scale manufacturing often end up offshore.7 Increasingly, experts believe that this off-shoring of manufacturing is contributing to the decline in the innovative capacity of the United States.8 Gary Pisano and Willy Shih have argued, for example, that the “ability to develop very complex, sophisticated manufacturing processes is as much about innovation as dreaming up ideas.”9 And as more and more production moved offshore, other industries in the host countries increasingly benefit from the knowledge, networks and capabilities that are also relocated. The result has been a loss of opportunity to lead in major emerging industries. The key technologies for rechargeable lithium-ion batteries and liquid-crystal displays were developed in the U.S., for example, yet were commercialized in Japan and now are almost entirely produced in Asia.10 Other materials and product technologies where the United States was the innovator, but then lost significant market share include oxide ceramics; semiconductor memory devices; semiconductor manufacturing equipment such as steppers; flat panel displays; robotics; solar cells; and advanced lighting.11 Academies Press, 2007. Jorgenson, Ho, and Stiroh have documented the step-up in total factor productivity introduced by these semiconductor-based technologies. 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. 7 See Gary P. Pisano and Willy C. Shih, “Restoring American Competitiveness,” Harvard Business Review, July-August 2009. For an analysis of why the U.S. is losing new high-tech manufacturing industries, also see Pete Engardio, “Can the Future be Made in America?” BusinessWeek, Sept. 21, 2009. 8 See for example, Roger Thompson, Why Manufacturing Matters, Harvard Business School, March 28, 2011. Access at http://hbswk.hbs.edu/item/6664.html. See also Stephen Ezell and Robert D. Atkinson,” The Case for a National Manufacturing Strategy.” Washington, DC: ITIF, April 2011. To some extent, the off-shoring of manufacturing may be reversing. A recent survey of manufacturing executives found that 85% of them identified low-volume, high-precision, high-mix operations, automated manufacturing and engineered products requiring technology improvements or innovation as the primary forms of manufacturing returning to the U.S. The survey was conducted by Cook Associates Executive Search, which polled nearly 3,000 manufacturing executives primarily in small- to mid-sized U.S. companies from October 13 through November 18, 2011. 9 Pisano, Gary P., and Willy C. Shih. "Does America Really Need Manufacturing?" Harvard Business Review 90(3), March 2012. 10 See Chapter 6 of this volume for case studies of the advanced battery and flexible display industries. See also Ralph Brodd, “Factors Affecting U.S. Production Decisions: Why are There No Volume Lithium-Ion Battery Manufacturers in the United States?” ATP Working Paper Series Working Paper 05–01, June 2005. 11 Gregory Tassey, “The Manufacturing Imperative,” presentation at NAS Conference on the Manufacturing Extension Partnership, November 14, 2011.

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20 RISING TO THE CHALLENGE The potential for growing major new U.S. industries that can provide a sizeable return on federal investments in university research is not being realized as manufacturing moves offshore.12 One barometer of this trend is that America’s strong trade surpluses in advanced-technology products in the 1990s have swung to annual deficits and reached $99 billion in 2011.13 [See Figure 1.1] At the same time, the United States is not paying sufficient attention to the essential pillars of the innovation ecosystem that have helped make the U.S. a global leader for so long. America’s research universities are facing severe financial constraints. The U.S. high-tech manufacturing base is eroding. The U.S. is less welcoming to highly skilled immigrants. Physical infrastructure is crumbling for lack of investment, and data communications networks are slipping below global standards. Severe budget problems are exerting intense pressure on federal and state lawmakers to cut successful programs aimed at commercializing technology and helping small business. As this report documents, this comes at a time when many other nations are investing aggressively to upgrade their universities, woo top foreign talent, attract investment in advanced manufacturing, build next-generation transportation systems, and connect their entire populations to high-speed broadband networks. 12 Eastman Kodak, which invented OLED technology, recently sold its core technologies to South Korean and Taiwanese interests that are now releasing commercial display products. See the presentation by John Chen, “Taiwan’s Flexible Electronics Program,” at the National Research Council conference on Flexible Electronics for Security, Manufacturing, and Growth in the United States, Washington, DC, September 24, 2010. The U.S. has 9 percent of global manufacturing capacity for solar cells and modules, while Europe has 30 percent, China 27 percent, and Japan 12 percent. See Michael J. Ahearn, “Opportunities and Challenges Facing PV Manufacturing in the United States.” The Future of Photovoltaics Manufacturing in the United States; Summary of Two Symposia, C. Wessner, ed., Washington, DC: The National Academies Press, 2011. Concerning solar cells, GE recently announced that it would build the largest solar panel factory in the United States in Aurora, Colorado. Kate Linebaugh, “GE to Build Solar-Panel Plant in Colorado, Hire 355 People,” Wall Street Journal, October 13, 2011. 13 Advanced technology products defined by the U.S. Census Bureau categorize 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. The United States registered trade surpluses in five of the ten categories in 2010 – aerospace, biotechnology, electronics, flexible manufacturing and weapons. But a very large deficit in information and communications offset these surpluses. 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.

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THE INNOVATION CHALLENGE 21 450 400 Exports Imports 350 Trade Deficit 300 Billions of Dollars 250 200 150 100 50 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 FIGURE 1.1 U.S. exports and imports of advanced technology products. SOURCE: U.S. Census Bureau, Foreign Trade, Trade in Goods with Advanced Technology Products. Coping with the Growth of New Competitors The reshaping global environment is affecting U.S. competitiveness.14 The rest of the world has become smarter, more focused, and more financially committed to developing globally competitive national innovation systems—the networks of public policies and institutions such as businesses, universities, and national laboratories that interact to initiate, develop, modify, and commercialize new technologies.15 14 A recent survey of its alumni by the Harvard Business School supports the view that the United States faces a deepening competitiveness challenge. A large majority believed that the United States not keeping pace with other economies, especially emerging economies, as a place to locate business activities and jobs. See Michael E. Porter and Jan W. Rivkin, “Prosperity at Risk,” Harvard Business School, January 2012. Access at http://www.hbs.edu/competitiveness/pdf/hbscompsurvey.pdf. 15 Nelson and Rosenberg popularized the term National Innovation System See Richard R. Nelson and Nathan Rosenberg, “Technical Innovation and National Systems,” in National Innovation Systems: A Companion Analysis, Richard R. Nelson, ed., Oxford: Oxford University Press, 1993, pg.

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22 RISING TO THE CHALLENGE As documented in this report, nations in Asia, Europe, and Latin America are boosting investments in both basic research and applied technologies in everything from nano-materials and renewable energies to life sciences. These nations also are encouraging once-cloistered universities and national laboratories to partner with industry, and wooing multinational factories and R&D centers into world-class technology parks with generous tax incentives. China is making an especially concerted drive to bridge the innovation gap with the U.S.16 As Yang Xianwu of China’s Ministry of Science and Technology explained in a National Academies conference, “The ultimate goal is to make China sufficiently innovative to match the level of countries such as the United States.”17 As this competition intensifies, the United States has tumbled relative to other nations in several global rankings of competitiveness and innovation. For example, the U.S. dropped from No. 1 to No. 5 among 142 nations in the most recent World Economic Forum rankings of “total competitiveness.” While ranking No. 5 overall in “innovation,” the WEF ranked the U.S. 13th in higher education and training, 16th in infrastructure, 20th in technological readiness, 2nd in “goods market efficiency,” 22nd in “financial market development,” and 39th in institutions.18 4. The term “national innovation system” was coined by Christopher Freeman. See Christopher Freeman, “ Japan: A New National Innovation System,” in G.Dosi, et al, Technology and Economy Theory (London: Pinter, 1988). Charles Wessner initially presented the term “innovation ecosystem,” which highlights the complex and non-linear characteristic of innovation processes, to the PCAST. See, for example, Charles W. Wessner, “Entrepreneurship and the Innovation Ecosystem,’ in David B. Audretsch, Heike Grimm and Charles W. Wessner, Local Heroes in the Global Village: Globalization and the New Entrepreneurship Policies, New York, NY: Springer, 2005. Influential earlier works on global policies to promote innovation include Charles Freeman, Theory of Innovation and Interactive Learning, London: Pinter, 1987; Bengt-Åke Lundvall, ed., National Innovation Systems: Towards a Theory of Innovation and Interactive Learning, London: Pinter, 1992; and Michael Porter, The Competitive Advantage of Nations, New York: The Free Press, 1990. Influential earlier works on global policies to promote innovation include Charles Freeman, Theory of Innovation and Interactive Learning, London: Pinter, 1987; Bengt-Åke Lundvall, ed., National Innovation Systems: Towards a Theory of Innovation and Interactive Learning, London: Pinter, 1992; and Michael Porter, The Competitive Advantage of Nations, New York: The Free Press, 1990. 16 Chapter 5 of this report provides a detailed case study of China’s push to industrialize and develop an innovation-based economy. 17 See Yang Xianwu, “International Collaboration and Indigenous Innovation,“ in Building the 21st Century: U.S. - China Cooperation on Science, Technology, and Innovation. C. Wessner, ed., Washington, DC: The National Academies Press, 2011. 18 See World Economic Forum, The Global Competitiveness Report 2011-2012 (2011), table 5.

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THE INNOVATION CHALLENGE 23 NEW TRENDS IN GLOBAL INNOVATION Strong Policy Focus on Innovation The twenty-first century is witnessing a rapidly evolving, intensely competitive global landscape. Political and business leaders in both advanced and emerging economies see innovation-led development as central to growth. China, India, Russia, Germany, and Singapore are among the many nations that are formulating comprehensive national strategies for improving their innovation capacity.19 In many cases, this objective is being pursued with sustained high-level policy attention and substantial funding for applied research and development. Governments also are providing support for innovative small and medium-sized enterprises and are forging innovation partnerships—often based on U.S. models—to bring new products and services to market. They also are investing aggressively to create, attract and retain industries in strategic sectors. This strong focus on innovation as the basis for economic development is a significant development. Traditional approaches to development followed the prescriptions of Neoclassical Economists who traditionally viewed factors such as capital, labor costs, and business climate as the keys to a nation’s growth. 20 Today’s focus on knowledge-based growth draws more on the ideas of New Growth economists, including Paul Romer and Robert Lucas, who have put greater emphasis on a nation’s innovation capacity.21 19 China’s 15-year comprehensive innovation strategy is described in the National Medium- and Long-Term Program for Science and Technology Development, 2006-2020, op. cit. An early outline of India’s new innovation strategy is found in National Innovation Council, Towards a More Inclusive and Innovative India, September 2010. Russia adopted a comprehensive game plan in November 2008 called The Concept of Long-Term Socio-Economic Development of the Russian Federation for the Period of up to 2020. 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 in Industry Canada, Achieving Excellence: Investing in People, Knowledge and Opportunity— Canada’s Innovation Strategy, 2001. An explanation of South Korea’s long-term science, technology, and innovation strategy, Vision 2025, can be accessed at http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN008040.pdf. 20 See Carl J. Dahlman, The World Under Pressure: How China and India Are Influencing the Global Economy and Environment, Palo Alto: Stanford UP, 2011. See also, Carl J. Dahlman, “The Innovation Challenge: Drivers of Growth in China and India,” in National Research Council, Innovation Strategies for the 21st Century: Report of a Symposium, Charles W. Wessner, editor, Washington, DC: The National Academies Press, 2007. 21 For a recent review of New Growth Theory, see Daron Acemoglu, “Introduction to Economic Growth,” Journal of Economic Theory, Volume 147, Issue 2, March 2012, Pages 545-550.

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24 RISING TO THE CHALLENGE Box 1.1 The Complexity of Innovation Innovation is the transformation of ideas into new products, services, or improvements in organization or process. Some innovations are incremental; others are disruptive, displacing exiting technologies while creating new markets and value networks.22 These innovations can lead to new economic opportunities, job growth, and increased competitiveness. A key characteristic of innovation is that it is highly collaborative and often multidisciplinary and multidirectional. To be effective, policies to encourage and accelerate innovation need to recognize this reality. Innovation is often described in terms of stages: basic research, applied research, followed by development and commercialization. In the real world, this process is often not linear, leading from one stage to the next. Technological breakthroughs (such as in semiconductor research) can precede, rather than stem from, basic research. Often, research can, in parallel, address challenges that are both fundamental and applied. 23 Many products are the result of multiple R&D iterations and draw upon technical sources other than their immediate R&D progenitors; many research projects generate results that are not anticipated – sometimes the unexpected outcomes are extremely important; and innovations often result from the manufacturing process itself. Ideas that result from the formalized exploration of knowledge do lead, in the long run, to innovations, but to expect this to be the case in the short run is misguided for both firms and governments. While innovation is not a direct consequence of R&D, it is also clear that continuous public investment has been critical in training a large number of people over many years and in creating the necessary environment to foster new technology-based businesses. This complexity of the innovation process also highlights the role that a variety of intermediating institutions play in fostering collaboration among the many participants—including individual researchers, universities, banks, angel investors, venture capitalists, small and large companies, and governments— across the innovation ecosystem. Connections among these participants are often imperfect. In some cases, for example, a venture capitalist may not realize the true significance of a new idea, meaning that it does not receive the funding needed to develop. In other cases, an individual firm may be reluctant to incur the high costs of research and development for knowledge that will benefit others as much or more than the investor; what economists call “public goods.” 22 Clayton M Christensen and Michael Overdorf, "Meeting the Challenge of Disruptive Change" Harvard Business Review, March–April 2000. 23 Donald Stokes, Pasteur’s Quadrant, Basic Science and Technological Innovation, Washington, DC: Brookings, 1997.

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THE INNOVATION CHALLENGE 25 These are but two common situations where the process of innovation can stall. Intermediating institutions, often with funding from both public and private sources, have often provided the way forward. The U.S. has a rich history of public-private partnerships that have provided a platform for successful cooperation.24 What sets the United States apart from most other industrial nations is that there is no overarching national innovation strategy to support, much less coordinate, disparate initiatives to build commercially oriented industries. Instead, as Charles Vest of the National Academy of Engineering has pointed out, the U.S. system consists of multiple centers of activity that are loosely organized but often highly entrepreneurial.25 Invention and product development are the result of knowledge that flows back and forth among complex, inter- linked, and often ad-hoc sub-ecosystems at universities, corporations, government bodies, and national laboratories. Dr. Vest concludes that the U.S. innovation system “frankly is not really a system. It is not designed or planned very explicitly.” Nevertheless, as Dr. Vest notes, it has worked remarkably well at producing commercial products, processes, and services.26 Paradoxically, this complexity with its many opportunities for entrepreneurship may be a major strength of the U.S. innovation system. Indeed, Nobel laureate economist Elinor Ostrom has extensively documented the adaptive advantages of open, institutionally diverse systems over linearly designed systems.27 Rapid Growth in R&D Spending The front end of any innovation system is research and development. Since World War II, the United States has enjoyed an overwhelming advantage over the rest of the world in R&D investment. With annual R&D spending for 2012 forecast on the basis of purchasing power parity at $436 billion, the U.S. remains far ahead of the next-largest forecasted R&D investor, China, at $199 billion.28 Among corporations, 9 of the world’s 20 largest investors in R&D are American-based.29 24 For a review of best practices among recent U.S. partnership programs, see National Research Council, Government Industry Partnerships for the Development of New Technologies, C. Wessner, ed., Washington, DC: The National Academies Press, 2003. 25 See Charles Vest, “Universities and the U.S. Innovation System,” Building the 21st Century: U.S. - China Cooperation on Science, Technology, and Innovation. C. Wessner, ed., Washington, DC: The National Academies Press, 2011. 26 Charles Vest, op. cit. 27 Elinor Ostrom, Understanding Institutional Diversity, Ewing, N. J.: Princeton University Press, 2005. 28 Battelle and R&D Magazine, 2012 Global R&D Funding Forecast, December 2011. 29 Barry Jaruzelski and Kevin Dehoff, “How the Top Innovators Keep Winning,” Booz & Co., 2010 (http://www.booz.com/media/file/sb61_10408-R.pdf).

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26 RISING TO THE CHALLENGE Box 1.2 Overcoming the Barriers to Innovation As noted in Box 1.1, the process of innovation is itself a complex one involving a variety of participants across the economy. Given the complex and multifaceted nature of innovation, policies to encourage innovation need to reflect this reality. Support for innovation first requires attention to key framework conditions including adequate investments in R&D, the security of intellectual property, a strong scientific and skills base, and a modern physical, legal, and cyber infrastructure. This includes business regulations that are simple and transparent as possible, consonant with public policy objectives such as health and environmental safety. Support for innovation also requires our attention to common barriers that can forestall the cooperation needed to bring new ideas to the marketplace. For example, cultural barriers often separate those in industry from academia, where the focus is more on understanding basic phenomenon than on achieving concrete results.30 These barriers are often reinforced by a legacy of organizational incentives; universities have traditionally emphasized the need to publish rather than commercialize research. Cooperation can also stall when there are information asymmetries—situations where some have better (or worse) information than others in a potential transaction. For example, a venture capitalist may not realize the true significance of a researcher’s new idea, with the result that it does not receive the funding needed to develop. Indeed, the economics literature has identified a variety of contexts where the wrong incentives lead to a failure of cooperation.31 Pro-innovation policies need to strengthen the framework conditions but also address these barriers to innovation. Successful American innovation policies do just that. The Bayh-Dole Act, for example, encourages innovation by changing the incentives faced by university faculty and administrators.32 30 For an illustrative example of barriers to innovation in the food industry, see Sam Saguy, “Paradigm shifts in academia and the food industry required to meet innovation challenges.” Trends in Food Science & Technology, Volume 22, Issue 9, September 2011, pp. 467-475. 31 The analysis of incentives in economics can be divided into research on issues related to distorted motivations (including public goods problems, and common pool resource problems) and issues related to incomplete or missing information (including moral hazard and adverse selection problems.) Theoretical work in this area of economics has been richly recognized by the Central Bank of Sweden in awarding Nobel Prizes to George Akerlof, Michael Spence, Joseph E. Stiglitz, Leonid Hurwicz, Eric S. Maskin, Roger B. Myerson and Elinor Ostrom, among others. 32 For a comparative review of the effectiveness of Swedish and U.S. policies to commercialize university intellectual property see Brent Goldfarb, and Magnus Henrekson, “Bottom-up versus top- down policies towards the commercialization of university intellectual property.” Research Policy 32 (2003) 639–658. The authors note that Swedish policies “have been largely ineffective due to a

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THE INNOVATION CHALLENGE 27 And the competitive evaluations of the Small Business Innovation Research program (SBIR) create new information for use by market participants about the technological and commercial potential of new ideas. These and other “best practices” in policy are being widely emulated around the world as policymakers in other nations seek to improve the innovative potential of their own economies. This overwhelming advantage is starting to slip, however. While American R&D spending has risen 3.3 percent a year on average in real terms over the past decade33, for example, growth in South Korea has averaged 9.2 percent annually and China has averaged 19.4 percent, albeit from a smaller base.34 As a result, the U.S. share of global R&D spending dropped from 43.1 percent in 1998 to 37.3 percent in 2008.35 China’s share, by contrast, leapt from 3 percent to 11.4 percent over that period, both as a result of increasing R&D intensity and a rapidly industrializing economy.36 America’s edge in research intensity (R&D as a percent of GDP) also is fading. America once was the most research-intensive nation on earth. America now ranks 8th in the most recent OECD tabulation of R&D intensity by country.37 This is a disturbing trend. U.S. investment in R&D amounts to around 2.9 percent of GDP, a level that has changed little in three decades. South Korea, by contrast, has boosted R&D spending from less than 2 percent of GDP in the early 1990s to 3.4 percent. Japan’s ratio has gone from 2.8 percent to 3.3 percent and China’s R&D spending has risen from 0.7 percent of GDP to 1.7 percent. [See Figure 1.2] The Chinese Government has announced plans to boost R&D intensity to 2.5 percent by 2020.38 Overall, Asia surpassed the U.S. in 2010 in R&D spending and the gap is expected to widen.39 lack of incentives for academic researchers to become involved in the commercialization of their ideas.” 33 National Center for Science and Engineering Statistics, National Patterns of R&D Resources: 2008 Data Update, Detailed Statistical Tables, NSF 10-314 (March 2010), Table 13, R&D spending from 1998 to 2008. 34 UNESCO, Institute for Statistics Database, Table 25, gross expenditures on research and development in constant prices from 1998 to 2008. 35 Ibid. 36 Ibid. 37 OECD, OECD Science, Technology and Industry Scorecard 2011 (September 20, 2011), p. 76. 38 UNESCO, UNESCO Science Report 2010 (UNESCO Publishing: Paris, 2010), p. 389. 39 See NSF Science and Engineering Indicators, 2012. Access at http://www.nsf.gov/statistics/seind12/slides.htm. See also Battelle, op. cit. Battelle estimated U.S. R&D spending at $415.1 billion in 2010 with Asia as a whole at $429.9 billion. The Goldman Sachs Global Markets Institute also estimates that research and development in Asia as a whole will likely overtake U.S. levels in the next five years. Goldman Sachs Global Markets Institute, “The New Geography of Global Innovation,” September 2010 http://www.innovationmanagement.se/wp- content/uploads/2010/10/The-new-geography-of-global-innovation.pdf.

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50 RISING TO THE CHALLENGE investments in science and technology will ultimately translate into the growth of new and more productive domestic industries.128 The assumptions underpinning this premise with regard to market size, first adopters, availability of finance and skilled labor are no longer assured, particularly in a number of promising emerging industries. For the United States, adjusting to the new challenges of 21st century global competition means not only taking steps to improve its own competitive position but also by recognizing and taking advantage of opportunities that arise with the increasingly dynamic and globally distributed geography of innovation. Often this involves corporate investment in research and production in rapidly growing markets overseas. Yet, there are also opportunities for public policy to enhance the attractiveness of the United States as a place for investments in promising new technologies. A well-trained workforce is a key component in any national strategy to exploit these emerging opportunities. This is why the 2007 National Academies report Rising Above the Gathering Storm documented how underinvestment in R&D, training of engineers, and falling education standards is eroding America’s lead in science and technology.129 Noting that “weakening commitments to S&T puts future U.S. prosperity in jeopardy,” the report warns of the risk of an abrupt loss of U.S. leadership in science and technology. The Gathering Storm argued that substantial increases in federal and corporate R&D are required to assure America’s long-term prosperity.130 The more recent update of the Gathering Storm Report noted that, due in part to the rising investments in science and innovation by other countries and regions, “the unanimous view of the committee members … is that our nation’s outlook has worsened.”131 However, public investments in research alone are unlikely to be sufficient. The Gathering Storm addresses the challenge of increasing the inputs to innovation. This report addresses the need to renew and broaden America’s innovation ecosystem to better capitalize on these inputs to generate commercial products, grow new industries, and, most importantly, create jobs that guarantee high living standards for millions of Americans. In other words, how can 128 For a review of the origins of postwar U.S. science and technology policy, see G. Pascal Zachary, Endless Frontier: Vannevar Bush, Engineer of the American Century, New York: The Free Press, 1997. Also, see Harvey Brooks, “The Evolution of U.S. Science Policy,” Chap. 2 in Bruce L. R. Smith and Claude E. Barfield, editors, Technology, R&D, and the Economy, Washington, DC, The Brookings Institution and American Enterprise Institute, 1996. mlb 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. An update of this report was recently published called Rising Above the Gathering Storm, Revisited: Rapidly Approaching Category 5, Washington, DC: The National Academies Press, 2010. 130 Ibid (2007). 131 Norman Augustine, et al. Rising Above the Gathering Storm, Revisited, Rapidly Approaching Category 5. Washington, DC: The National Academies Press, 2011.

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THE INNOVATION CHALLENGE 51 America produce more economic value from its tremendous investments in research and development? To sustain public support for current levels of taxpayer funding for research, innovation ultimately needs to pay off in the form of jobs and economic growth. Policies to Capture the Value of Innovation in Some Leading Countries and Regions The successes of other nations and regions show that it is possible to benefit from the global flows of goods, technology, capital, talent, and creative ideas in ways that also generate dynamic growth industries at home. Some of these strategies, policies, and programs being undertaken abroad offer valuable lessons deserving study by American policymakers at the federal, state, and local level. The Committee does not endorse these initiatives, though some offer positive lessons on what could be adopted and adapted to the U.S. context. Indeed, the focus of these programs, the instruments they use, and their funding levels may have important lessons for U.S. policy. • Germany is proving that even a high-wage nation can compete globally in manufacturing. The German government invests $2.3 billion a year in industrial production and technology research—six times more than the United States.132 A surge in exports from small and large firms alike of everything from kitchen equipment and industrial machinery to high-speed trains and wind turbines helped power Germany out of the recent recession.133 German exports to China have soared. One of Germany’s secrets: Strong and consistent investment in job training, worker retention, and applied research programs such as the Fraunhofer Institutes that partner with companies to turn advanced technologies into production processes and commercial products, coupled with active export promotion support from the highest level of government.134 • Singapore has shown that steady investment in S&T higher education and world-class research infrastructure, combined with the right financial incentives and policy climate, can attract substantial investment by multinationals that can turn a region into a global R&D 132 Sridhar Kota, “Stimulating Manufacturing in Ohio” Presentation at National Research Council symposium, “Building the Ohio Innovation Economy,” April 25, 2011. 133 Anthony Faiola, “Germany Seizes on Big Business in China,” Washington Post, September 18, 2010. 134 See presentation by Roland Schindler, executive director of Fraunhofer, at the National Research Council conference on, Meeting Global Challenges: U.S.-German Innovation Policy, Berlin, May 24-25, 2011. With regard to worker retention, see Klaus Zimmerman, “Germany’s Support for Manufacturing and Export Performance.” Presentation at the National Academies conference on Meeting Global Challenges: U.S.-German Innovation Policy, November 1, 2010, Washington, DC.

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52 RISING TO THE CHALLENGE hub.135 Now Singapore is investing aggressively to build an “innovation-driven economy.” Among other things, Singapore is investing some $10 billion in a network of research parks in a 500-acre urban district called One North. They include Biopolis, a 4.5 million- square-foot campus housing 5,000 life science researchers from universities, hospitals, and multinationals such as Eli Lilly and Novartis, and Fusionopolis, a futuristic 24-story tower filled with media, communications, and information-technology companies.136 • China is leveraging its enormous talent pool, domestic market, foreign investment, and mounting wealth to make significant progress in growing technology-intensive industries. China has doubled its share of global R&D spending from 6 percent in 1999 to 12 percent in 2010.137 Already a leading exporter of everything from computers and telecom networking equipment to solar modules, China is investing aggressively to become a dominant producer of advanced products like electric vehicles, solid-state lighting devices, and commercial aircraft. Among China’s ambitious goals are to sell 1 million electric vehicles a year by 2015, have renewable energies account for 15 percent of energy consumption, and generate 1 million patents a year by 2015. 138 It is determined to become a world-leader in manufacturing everything from automobiles to advanced computers and seems prepared to make the investments and use its market power to do so.139 • Finland’s success in telecommunications and electronics shows that even a relatively small nation or region can become a global leader in high-tech industries if high levels of government investment in R&D are aligned with skillfully applied research by corporations and universities. Tekes, Finland’s funding agency for technology and innovation, invests some €600 million a year in hundreds of research projects in emerging technologies. Much of that funding is direct grants to companies, which match the funds and work in collaborations lasting three to five years with universities and research institutes.140 • Taiwan has demonstrated that focused investments in applied research and a systematic system for absorbing and disseminating foreign 135 See Yena Lim, “The Singapore S&T Park”, National Research Council, Understanding Research, Science and Technology Parks: Global Best Practices. C. Wessner, ed., Washington, DC: National Research Council, 2009. 136 Source: Singapore Economic Development Board. Access at http://www.edb.gov.sg/edb/sg/en_uk/index.html. 137 Battelle, op. cit. 138 The Guardian, “China plans to make a million electric vehicles a year by 2015,” February 18, 2011. 139 BBC, “China claims supercomputer crown.” October 28, 2010. 140 Heikki Kotilainen, “The TEKES experience and new initiatives,” National Research Council, Innovation Policies for the 21st Century, op. cit.

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THE INNOVATION CHALLENGE 53 technology can produce globally competitive high-tech industries. Thanks largely to public-private partnerships led by the Industrial Technology Research Institute (ITRI), Taiwan has become a world leader in semiconductor manufacturing, digital displays, and notebook computers.141 Now Taiwan is developing fast-growing innovation clusters in fields such as semiconductor design, flexible displays, and biomedical devices.142 • Canada has invested heavily over the past decades to upgrade its university research system and draw international talent. Through the Foundation for Innovation, the government has committed more than $5 billion since 1997 to fund 6,300 projects at 130 research institutions. Of the thousands of new faculty and researchers hired by universities through such grants, more than 40 percent were recruited abroad.143 With the Canada Chairs program, 30 percent of the nearly 2,000 department chairs hired through another program also were recruited outside of Canada.144 The Growing U.S. Response: Federal Government In his 2011 State of the Union address, President Barack Obama declared that “we need to out-innovate, out-educate, and out-build the rest of the world.” The President also observed that “none of us can predict with certainty what the next big industry will be or where the new jobs will come from.” But “what we can do—what America does better than anyone else—is spark the creativity and imagination of our people.”145 The recognition of the global innovation challenge at the highest levels of the government is as exceptional as it is welcome. Unlike most other industrial nations, the United States does not have a comprehensive national innovation strategy. The U.S. instead has tended to address specific needs and goals through targeted, short-term legislation and with programs that shift from one Administration to the next. The federal government has paid more attention to innovation and economic 141 Alice H. Amsden, “Taiwan’s Innovation System: A Review of Presentations and Related Articles and Books,” Memorandum on the National Academies symposium “21st Century Innovation Systems for the U.S. and Taiwan: Lessons from a Decade of Change,” January 4-6, 2006, Taipei. 142 Taiwanese researchers have won a number of recent R&D 100 Awards is these categories. For example, see R&D Magazine, “R&D 2010 Winners,” July 7, 2010. 143 Canada Foundation for Innovation, 2009 Report on Results: An Analysis of Investments in Infrastructure, (http://www.innovation.ca/docs/accountability/2009/2009%20Report%20on%20Results%20FINAL EN.pdf). 144 Government of Canada website on “Canada Research Chairs.” Access at http://www.chairs- chaires.gc.ca/home-accueil-eng.aspx. 145 See the address by President Obama to the National Academy of Sciences, April 27, 2009. See also the President’s 2011 State of the Union Address, White House, January 25, 2011.

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54 RISING TO THE CHALLENGE competitiveness issues in recent years, driven in part by efforts to recover from the recession and the job crises it engendered. Many states have tended to be more active. States like Ohio and Michigan, which have been hard hit by the nation’s manufacturing decline, are making substantial investments in future industries. The federal government has acted upon some of the Gathering Storm recommendations to shore up America’s performance in science in technology. Research budgets for the Department of Energy, National Science Foundation, and National Institute of Science and Technology (NIST) and federal funding for K-12 science, technology, and mathematics education have increased substantially, for example.146 The government established the Advanced Research Projects Agency-Energy (ARPA-E), 147 and has speeded up processing of student visas.148 Legislation to expand R&D tax credits and make them permanent is being considered by Congress. 149 Overall, however, the 2010 Gathering Storm, Revisited report concluded that “our nation’s outlook has worsened” over the previous five years relative to the rest of the world. On January 6, 2011, President Obama signed into law the reauthorization of the America COMPETES Act, a modified version of a law passed in 2007 but one not funded by Congress.150 Among other things, the law further increases federal research budgets of the NSF, NIST, and the DOE’s Office of Science and seeks to better coordinate federal science, technology, and math education programs. The act also provides funding for “high risk, high reward” research and several multi-agency collaborations.151 Again, however, these provisions have not yet been funded. President Obama also has unveiled a national innovation strategy that calls for increasing U.S. investments in R&D, higher education, and information-technology and transportation infrastructure. The plan also calls for 146 Gathering Storm Revisited, op. cit. 147 The Advanced Research Projects Agency-Energy (ARPA-E) was established under H. R. 364 in 2007 to conduct cross-disciplinary high-risk, high-reward research on new energy technologies and is modeled after the Defense Advanced Research Projects Agency (DARPA). Its initial budget was included in the American Recovery and Reinvestment Act of 2009. 148 Gathering Storm Revisited, op. cit. 149 Originally created in 1981, the Research and Experimentation Tax Credit has been renewed 14 times, mostly recently when President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 in December 2010. 150 The America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education and Science Reauthorization Act of 2010 (P. L. 111-358) is better known as the America COMPETES Act. The earlier version of this act (P.L. 110-69) was signed into law by President George W. Bush on August 9, 2007. 151 For an analysis of the America Competes Reauthorization Act of 2010, see Heather B. Gonzalez, John F. Sargent, and Patricia Moloney Figliola, “America COMPETES Reauthorization Act of 2010 (H.R. 5116) and the America COMPETES Act (P. L. 110-69): Selected Policy Issues,” Congressional Research Service, July 28, 2010 (http://www.ift.org/public-policy-and- regulations/~/media/Public%20Policy/0728AmericaCompetesAct.pdf).

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THE INNOVATION CHALLENGE 55 reforming government regulations and creating new incentives to improve America’s competitiveness as a place to do business.152 There also is a growing emphasis on coordination among federal agencies around initiatives by state and local governments to support specific regional innovation clusters aimed at meeting national needs. Under White House leadership, the SBA, NIST, EDA, NSF, and EDC, for example, joined an effort by the DOE to establish “energy-innovation hubs”—regional innovation clusters in solar power, energy-efficient buildings, nuclear energy, and advanced batteries. The first $129.7 million project seeks to create an innovation hub devoted to developing technologies, designs, and systems for energy-efficient buildings that will be based at the Philadelphia Navy Yard Clean Energy campus.153 President Barack Obama’s 2009 budget also allocated $50 million administered by the Commerce Department’s Economic Development Agency to assist regional cluster initiatives,154 while the SBA is working with state agencies and the DOD to help launch robotics clusters in Michigan, Virginia, and Hawai’i.155 The U.S. government has stepped up financial incentives to support commercialization of technologies. Under the American Recovery and Reinvestment Act (ARRA) of 2009,156 for example, the DOE extended $6 billion in loan guarantees for renewable-energy and electricity transmission projects, $11 billion in spending and loan guarantees for “smart grid” projects, $117 million to expand the development, deployment and use of solar energy throughout the U.S., and $2.4 billion in grants for manufacturers of advanced batteries and key materials.157 It is important to note, however, that the ARRA 152 Executive Office of the President, A Strategy for American Innovation: Driving Towards Sustainable Growth and Quality Jobs, National Economic Council and Office of Science and Technology, September 2009. http://www.whitehouse.gov/assets/documents/SEPT_20__Innovation_Whitepaper_FINAL.pdf). Also see White House, Fact Sheet: Obama’s Plan to Win the Future,” Office of the Press Secretary, January 25, 2011. 153 Department of Energy press release, “Penn State to Lead Philadelphia-based team that will pioneer new energy-efficient building designs,” August 24, 2010, (http://www.energy.gov/news/9380.htm). Details of the energy innovation research cluster can be found in the funding opportunity announcement for Fiscal year 2010 on the DOE Web site at http://energy.gov/hubs/documents/eric_FOA.pdf. 154 President Obama’s fiscal 2009 budget provided $50 million in regional planning and matching grants within the Economic Development Administration to “support the creation of regional innovation clusters that leverage regions’ existing competitive strengths to boost job creation and economic growth.” See Executive Office of the President, A Strategy for American Innovation, op. cit. 155 See Karen Mills, “Luncheon Address,” in Growing Innovation Clusters for American Prosperity, Report of a Symposium, C. Wessner, ed., Washington, DC: The National Academies Press, 2011. 156 The American Recovery and Reinvestment Act of 2009, the $787 billion U.S. economic stimulus legislation passed by Congress, includes $59 billion in new spending and tax credits for the development and expansion of energy technology. 157 SmartGridNews, “$2.4 Billion Going to Accelerate Advanced Battery and EV Manufacturing.” August 5, 2009.

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56 RISING TO THE CHALLENGE (stimulus programs and funding) was a one-time, non-recurring event which has now ended. The DOE loan guarantee program has also been shutdown in the midst of political controversy.158 This lack of policy continuity and sustained support for emerging technologies separates the U.S. from many of its global competitors. While fossil and nuclear subsidies have been long term and therefore bankable, subsidies for renewable energy technologies have been subject to short term changes. In wind technology, unstable funding of the production tax credit has resulted in huge drops in investment – with damaging consequences to the development of a robust U.S. wind industry and competitiveness.159 Because most of these programs are in the very early stages, it is difficult to measure their impact on the U.S. economy and regional economies. If successful, they can potentially serve as models for additional efforts in other sectors. Their success, however, will depend upon sustained funding over the long term and will benefit from a sustained partnership between federal, state, and local agencies. The Growing U.S. Response: State and Regional Initiatives While few regional innovation initiatives in the U.S. can match the financial resources and policy force of those launched by foreign governments, a number of states are starting to achieve impressive results in building innovation-led industries with bold and comprehensive strategies. Promising state and regional initiatives often reflect a holistic understanding of what it takes to build a 21st century innovation ecosystem and compete globally in specific industries. They include public-private partnerships in which corporations, universities, and governments pool resources to establish R&D centers,160 train workforces, develop supply and support industries, and provide risk capital to starts-ups where angel and venture funding is lacking. 161 To help offset the gap between financial incentives at offshore locations, state governments also are deploying a wider range of policy tools, from tax credits 158 Forbes, “DOE Rescinds Solar Loan Guarantees in Wake of Solyndra Bankruptcy.” September 23, 2011. 159 Institute for Energy Research, “Assessing the Production Tax Credit,” April 24, 2012, Access at http://www.instituteforenergyresearch.org/2012/04/24/assessing-the-production-tax-credit/. 160 The Pew Center on the States, Investing in Innovation, 2007. Access at http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/State- based_policy/NGA_Report.pdf. 161 A 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, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2003, page 23.

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THE INNOVATION CHALLENGE 57 and R&D grants to low-cost loans and free or subsidized workforce training.162 These are a few examples of promising regional strategies— • New York: The Capitol Region in upstate New York, hard hit by a decades-long decline in manufacturing, has become one of the world’s premier hubs of semiconductor and nanotechnology R&D. As a result, it is attracting new investment in high-tech manufacturing, including a $4.5 billion silicon wafer fabrication plant by Global Foundries. The catalyst: State investments in public-private research centers, academic programs, and state-of-the-art research laboratories at the State University of New York at Albany that have drawn more than $5 billion in investment by companies such as IBM, AMD, Applied Materials, and Tokyo Electron.163 • Michigan: In a little over four years, Michigan established itself as one of the world’s primary production centers of lithium-ion batteries for future electrified vehicles and power-grid storage—an industry that Asia was poised to dominate. By combining generous manufacturing tax credits with a comprehensive game plan to leverage the state’s existing strengths in automotive R&D, engineering, and advanced components manufacturers, Michigan attracted $1.3 billion in one-time Recovery Act (ARRA) funds and $6 billion in private investment in 16 battery-related factories that are expected to create 62,000 jobs in five years.164 • Ohio: The Northeast Ohio Technology Coalition, an organization funded by foundations and business associations to develop high-tech economy in a 21-county region devastated by the decline of manufacturing, is spearheading programs to build a manufacturing base in flexible electronics and advanced energy with the help of $2.3 billion in state funding for cluster initiatives.165 State initiatives include the Ohio Third Frontier program, which provides early-stage capital for start-ups and funds applied research, working training, and entrepreneurial assistance. The JumpStart program seeks to enhance the state’s entrepreneurial ecosystem through advice from successful 162 See National Research Council, Growing Innovation Clusters for 21st Century Prosperity, C Wessner, ed., Washington, DC: The National Academies Press, 2011. Also see Pete Engardio, “State Capitalism,” BusinessWeek, February 6, 2009. 163 See Pradeep Haldar, “New York’s Nano Initiative,” in Growing Innovation Clusters for 21st Century Prosperity. Op cit. 164 Data from Michigan Economic Development Corp. See National Research Council, Building the U.S. Battery Industry for Electric-Drive Vehicles: Progress, Challenges, and Opportunities, C. Wessner, ed., Washington, DC: The National Academies Press. 165 See the presentation by Rebecca Bagley, “The Role of NorTech: Promoting Innovation and Economic Development” at the National Research Council conference on Building The Ohio Innovation Economy, Cleveland, April 25, 2011.

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58 RISING TO THE CHALLENGE entrepreneurs and selective investments in high potential companies.166 A network of seven Edison Technology Centers help manufacturers commercialize technologies. • New Mexico: Even though research universities and national laboratories based in the state received $6 billion in federal research funding a year, New Mexico had few high-tech start-ups until recently. Clusters are emerging in renewable energy, aerospace, information technology, and digital media. Catalysts include the nation’s first science park connected to a national laboratory—located next to the Sandia National Laboratories’ Albuquerque campus—and large state investments in early-state capital funds, high-performance computer infrastructure, public-private research partnerships, tax credits for targeted industries, and worker training.167 • West Virginia: Morgantown, West Virginia, has become the hub of rapidly growing clusters in biometrics and new energy technologies by building alliances between industry, national laboratories, and regional universities such as West Virginia University, Carnegie Mellon, and the University of Pittsburgh. The cluster in biometrics technologies that identify individuals through biological traits, for example, leverages research partnerships with the Federal Bureau of Investigation, a pioneering degree-granting program at West Virginia University, and CITeR, the Center for Identification Technology Research.168 Morgantown has attracted operations by Booz Allen Hamilton, Northrup Grumman, Lockheed Martin, and other corporations.169 • South Carolina: The state has been a low-cost base for car assembly for decades. Now Clemson University is helping South Carolina become a hub for advanced systems design and manufacturing. Clemson converted an empty 250-acre site into the Industrial Center for Automotive Research that has “generated more than $220 million in 166 The Jumpstart program was launched in 2003 with founding grants from the Cleveland Foundation, Cleveland Tomorrow, Ohio Department of Development, and the George W. Codrington Foundation. See http://www.jumpstartinc.org/. 167 See Richard Stulen, “The Sandia Science & Technology Park” in National Research Council, Understanding Research Science & Technology Parks: Global Best Practice, C. Wessner, ed., Washington, DC: The National Academies Press, 2009. See also the presentation by Thomas Bowles at the National Academies Symposium, Critical National Needs in New Technologies: Opportunities for the Technology Innovation Program,” April 24, 2008. For an analysis of Sandia National Laboratory’s science park initiative, see National Research Council, Industry-Laboratory Partnerships: A Review of the Sandia Science and Technology Park Initiative, C. Wessner, editor, Washington, DC: National Academy Press, 1999, and presentation by J. Stephen Rottler, “Sandia National Laboratories as a Catalyst for Regional Growth” in the National Academies Symposium on Clustering for 21st Century Prosperity, February 25, 2010. 168 CITeR is an Industry/University Cooperative Research Center funded by the National Science Foundation. The center was founded by West Virginia University and is the I/UCRC’s lead site for biometrics research and related identification technologies. 169 James Clements in Growing Innovation Clusters for 21st Century Prosperity, op. cit.

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THE INNOVATION CHALLENGE 59 public and private investment and created more than 500 new jobs with an average salary of $72,000.”170 Partners with Clemson include BMW, Timken, Michelin, IBM, Dale Earnhardt, Inc., Sun Microsystems, the Society of Automotive Engineers, and the Richard Petty Driving Experience.171 • Kansas has developed a thriving cluster in aerospace, and deployed hundreds of millions of dollars of state income-tax withholdings from employees of bioscience-related companies to grow a bioscience cluster focusing on agriculture. 172 With a few notable exceptions, most state innovation strategies have received little federal support—even though a number of federal agencies have long had economic-development programs seeking to achieve similar aims. 173 “All of this is occurring on an ad-hoc basis without a formal U.S. policy,” noted Ginger Lew, then of the White House National Economic Council. 174 In addition, federal programs to support state and regional initiatives are often viewed as being too small in scale or possessing timelines that are too short to provide the confidence needed by businesses to make sizeable investments over the long term.175 Looking Ahead The changing global context raises questions about whether the traditional basis for America’s innovation policies is adequate for addressing the competitive challenges of the 21st century. The rapid globalization of innovation has diminished what were once overwhelming American advantages as the prime location for creating, commercializing, and industrializing technology. Basic research and world-class engineering talent now are highly dispersed around the world, especially in important fields such as nanotechnology, 170 See presentation by Clemson University President James Barker in Understanding Research, Science, and Technology Parks, op. cit. 171 Ibid. 172 Presentation by Richard Bendis,” Innovation Infrastructure at the State and Regional Level: Some Success Stories,” at the National Academies Symposium on Building the Arkansas Innovation Economy, March 8, 2010. 173 See Karen G. Mills, Elisabeth B. Reynolds, and Andrew Reamer, “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies,” Metropolitan Policy Program at Brookings, April 2008. Also see Michael E. Porter, “Clusters and Economic Policy: Aligning Public Policy with the New Economics of Competition,” Institute for Strategy and Competitiveness White Paper, revised May 18, 2009. 174 Remarks by Ginger Lew, “The Administration’s Cluster Initiative,” in at the National Academies Symposium on Clustering for 21st Century Prosperity; Summary of a Symposium, February 25, 2010. 175 Remarks by Sridhar Kota at the National Academies Symposium on Building the U.S. Battery Industry, July 26, 2010.

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60 RISING TO THE CHALLENGE computer science, and renewable energies. How, then, can the U.S. maintain its leadership in innovation? The next chapter addresses this challenge.