U.S. Innovation and Economic Recovery

[Editor’s Note: This is part of CFR’s Renewing America initiative , which examines how domestic policies will influence U.S. economic and military strength and its ability to act in the world.]

News of rising unemployment and the threat of a Moody’s downgrade puts the lagging economic recovery into sharp focus and puts pressure on the United States to spur innovations that boost global competitiveness. President Barack Obama’s 2011 State of the Union address stressed the need to "out-innovate, out-educate, and out-build the rest of the world" to remain competitive and "win the future." While U.S. funding of research and development (R&D) has remained consistent at around 2.5 percent of GDP over the last thirty years (WSJ), sharp increases in spending by emerging markets such as China and India--as well as the global financial crisis and a need to sharply curtail U.S. debt-- has put the United States in a potentially disadvantageous position.

While most economists agree that the federal government must spur innovation to remain competitive, experts are divided over the best policies to achieve this. Adam Segal emphasizes the federal government’s role in funding high-risk, high-return R&D, especially as business shifts away from research not geared toward commercial usage. Rodney W. Nichols echoes Segal, but also calls for reducing regulatory and environmental hurdles and improving science and math education. Robert Litan focuses on research within the academic community, arguing that universities should not be able to monopolize the licensing of faculty members’ innovations. James Dougherty argues for improving the high-skilled visa system and using the Small Business Administration to encourage entrepreneurship and risk capital.

Adam Segal, Ira A. Lipman Chair in Emerging Technologies and National Security and Director of the Digital and Cyberspace Policy Program

R&D is the starting point for innovation--the discovery that, under the right conditions, can spark the creation of a whole new industry and drive economic growth. The government’s role in funding basic research has become even more important as business has shifted away from funding "blue sky" projects with uncertain immediate commercial use but with the promise of big breakthroughs. Alcatel-Lucent, for example, announced in 2008 that Bell Labs--responsible for six Nobel Prizes as well as the invention of the transistor, the laser, and numerous other communication and computer technologies--would no longer conduct basic research in material physics and semiconductors, but instead would focus on networking, high-speed electronics, wireless, software, and other commercial applications.

The Obama administration has signaled its intention to try and fill this gap with federal funds. While the FY 2012 budget proposes $148.9 billion for federal research agencies, a slight decrease (0.3 percent) from FY 2010, its 10.6 percent increase ($66.9 billion) for basic and applied research will produce the largest federal research investment in real terms in history, according to the American Association for Advancement of Science (PDF). Federal investment in R&D, however, remains hostage to the larger political debate about how to reduce spending and the deficit.

No matter the final numbers, it is essential that the money funds high-risk, high-return R&D. Hard times make scientists more conservative, as they seek to secure grants by writing proposals that extend what they already know, not striving toward something new. To counteract the tendency to stay in comfortable territory, more money should be directed to early-career grants and to support well-designed failures--ideas that push the envelope of accepted paradigms.

The results of federally funded R&D are widely available and thus mobile. It is entirely possible that companies can develop the findings of basic research to create high-wage jobs outside of the United States. The R&D tax credit can be used to ground these results locally by forging ties among industry, universities, and government. Research consortia involving three companies or investments in collaborative research at a federal research laboratory or an American university could be offered a tax break equal to 20 percent of their R&D spending.

Basic scientific research remains essential to economic growth and to other American priorities, including military power and the reduction of the country’s dependence on foreign oil. The point, however, is not just to fund more, but to ensure that it is cutting-edge and local.

Rodney W. Nichols

Three clusters of essential actions are time-tested for spurring innovation. The first might be labeled "tried and true" principles. One such principle is to reduce regulatory hurdles for introducing new products, such as medical devices and new drugs through the FDA. Patient safety need not be compromised. Another is to refrain from adding environmental rules that block the expansion of energy production, such as in the search for new sources of oil and gas with modern technologies. Environmental risk need not be raised. A further step is to extend the R&D tax credit on a permanent basis so that firms can plan their commitments to science and technology with greater certainty. These steps reopen the tides of Schumpeter’s "creative destruction" in the United States and strengthen America’s inherent global advantage.

A second cluster, about human capital, is more long range. Foremost is K-12 education in science and math. Many leaders are demoralized about trying to fix the schools. Yet even in our decentralized system, the federal government can help by jawboning and pressing for more competition, experiments, and higher performance, i.e., deep reforms that stick. And, of course, let us also open our doors to immigrants who are talented professionals, and welcome more foreign investment in high-tech sectors.

A third initiative is increasing the federal investments in fundamental research and in the early-stage applications by all of the mission-oriented agencies. This has become harder as our fiscal squeeze has become an almost unbearable vise. While it is a tough sell to make a public case for taxpayer-paid voyages of discovery when the unemployment rate is 9 percent, the only way to spark innovation is to push the frontiers. Federal spending on all of R&D is about $145 billion this year, and that is under intense budgetary pressure. Yet there is no way to achieve innovation on the cheap. So I recommend adding 10 percent this year and 5 percent for each of the next five years; that would send a powerful, confidence-raising signal to the American technological community, and to rest of the world, that the United States is coming raring back.

Goethe once said about science: "To one man it is the highest thing, a goddess; to another it is a productive cow who supplies them with butter." We must honor the goddess and feed the cow.

Robert E. Litan

Mention the need for the federal government to stimulate more innovation, and the typical response is to seek more money for R&D. Not only is this first impulse misplaced, it is now not likely to be satisfied in a future marked by greater budget austerity.

But do not despair. By fixing the rules that govern the commercialization of faculty-developed innovations, the federal government can encourage more ideas and help bring them to market more quickly without having to spend any more money.

The typical contract university scientists have with their universities has two important elements. One feature requires them to share any profits they may earn from royalties or other income generated by the commercialization of their ideas. The other key contract clause limits them to using their university’s technology licensing office (TLO) to license their technologies, either to companies faculty may create or to other enterprises.

Although faculty would be further encouraged to come up with new ideas with commercial potential at a faster rate if they owned all of the intellectual property in their discoveries, universities can plausibly argue they deserve some of the gains from faculty-inspired successes because they pay their salaries and give them a place to work.

But there is no legitimate rationale for universities having a monopoly on deciding how to commercialize innovations developed by their faculty. Universities don’t act that way when it comes to faculty publications; why should they call all of the shots on the licensing of ideas?

If faculty inventors had the freedom to make their own licensing decisions, they would no longer be at the mercy of TLO bureaucracies. A true market in licensing services would develop, just as it has for other inventors.

The government can and should speed the development of such a market--and the accelerated commercially relevant innovation it would generate--by conditioning research grants on universities giving their faculty freedom to license. End this artificial monopoly on licensing and watch how the magic of the market can produce a win-win for all: benefiting universities with more licensing revenue and consumers with the more rapid availability of new products and services.

James P. Dougherty

In a rapidly changing world, wrought by incessant technological advances and global dissemination of technology, America must respond to keep its seat at the head of the economic and innovation table. There are three straightforward actions that can be taken that would have large and immediate benefits.

Aggressively improve the H1B visa process

First, strategically simplify and speed up visas for the best and brightest from around the world. The United States may have already hit a negative tipping point, which we hope can be reversed, but we must move quickly. In 2008, all 65,000 H1B visas were gobbled up the first day of availability. In 2011, only 16,500 visas were applied for on the first day! This is a stunning turn of events that is harmful to U.S. interests.

The economic downturn and better options in home countries definitely have an impact. But the fact is that many very talented people with choices don’t want to go through the hassle of the U.S. visa system. It is viewed as unfriendly, long, and unpredictable. Whether that impression is right or wrong, that’s how it is often perceived. The Congress and the State Department should make it an urgent priority that these highly qualified individuals are always welcome in the United States, as they have been for most of our history.

Enable and encourage entrepreneurship

Second, the Small Business Administration (SBA) should catalyze innovation organizations across the country. Such organizations as Y Combinator and TechStars are great examples that grew organically in places where concentrations of innovation already existed and are doing great work fostering entrepreneurship. What needs to happen is to spread this type of organization to smaller cities throughout the country.

SBA should select a meaningful number of cities and set out to bring together local universities, existing businesses, and entrepreneurs to jumpstart local innovation organizations. SBA could, in addition to providing seed money, offer access to facilities, best practices, and connections to other centers. But it must be done strategically and with the specific mission to replicate innovation organizations across America to empower entrepreneurs, the bedrock of our national economy.

Encourage risk capital

With technology advances allowing for lower costs and faster times to launch new companies, early-stage risk "angel" capital increases in strategic importance. To encourage risk capital, the government should allow some portion of early-stage investments to be written off against current income. Maintaining a low capital gains tax rate is crucial as well. The SBA could also augment the innovation centers just mentioned with organized angel investor activities. Growing the size of risk capital and the number of angel investors is more important than ever.