Setting a policy framework that supports innovation is critical for at least two reasons. First, it enhances the competitiveness of US-based industries and supports domestic economic growth. Second, the nation stands to benefit from well-paying jobs if multinational corporations see the United States as the best place to perform research and development (R&D) and other activities related to innovation and ultimately to build factories and offices here.³

Our own history and contemporary international examples show that leadership in research is not a sufficient condition for gaining the lion’s share of benefits from innovation. Recent developments in Japan illustrate what can happen to a science- and technology-based economy that does not adapt its innovation environment to changing conditions. Japan’s growth trajectory in various science and engineering inputs and outputs (R&D investment, science and engineering workforce, patents) since the early 1990s has been similar to what it was before that time.⁴ Yet its ability to profit from innovation in the form of higher productivity and income has recently fallen. Part of the explanation for the change is in the dual nature of the Japanese economy: World-class manufacturing that serves a global market exists side-by-side with inefficient industries, such as construction.⁵ Economic mismanagement and a lack of flexibility in labor and capital markets also are to blame.

In contrast, in the middle 1990s the United States saw a jump in productivity growth from that which had prevailed since the first oil shock of the early 1970s.⁶ In addition to continuous gains in manufacturing productivity and productivity growth generated by the use of information technology, the creation of new business methods that took advantage of information technology were widespread here.

Science and technology and the innovation process are not zero-sum games in the international context.⁷ The United States has proved adept in