recently as 6 years ago, only 8% of the money newly invested in US stock funds went overseas; now the fraction has reached 77%.

There remain a number of other factors in the US innovation ecosystem that might lead firms to locate new facilities elsewhere. For example,

  • The US effective corporate tax rate of about 40%, including state taxes, is, according to the Tax Foundation, higher than that of all but one other developed nation. Exacerbating the problem, most US corporate taxes, unlike those of many other nations, apply to global earnings. For example, a US firm competing in Ireland has imposed on it a 35% net US federal tax rate, whereas an Irish firm pays 12.5%—which was reduced from 50% as Ireland successfully girded itself for the global economic race. Many nations offer “tax holidays” for a specified period when new entities establish themselves within the nations’ borders. In the early 1990s, the United States ranked first among OECD nations in offering tax incentives for R&D; but by 2004, it had fallen to 17th place. Perhaps the most significant factor in this regard is the federal R&D tax credit that requires renewal by Congress and the president each year and is therefore unreliable and diminished in value to companies addressing the long-term decisions implicit in the conduct of R&D.

  • The US patent system is in many respects antiquated. In the words of Michael Splinter, CEO of Applied Materials, Inc., “Those of us who are patenting inventions are becoming hostages to those who are inventing patents. The current system is an invitation to litigation.” It seems that the jobs that our patent system is creating are largely for lawyers, not scientists, engineers, and entrepreneurs and those they serve.

  • US firms are among the few that directly bear the responsibility for funding major portions of the health care received by their employees, their employees’ families, and their retirees and their families. That is an admirable social practice, but the cost of providing such benefits must be recovered in the prices that the firms charge for their products or services. It is not an immaterial cost: General Motors now spends more on health care than on steel; Starbucks spends more on health care than on coffee. Many executives responding to a recent PriceWaterhouseCoopers survey indicated that health-care costs, now 16% of the entire GDP, have had a “major impact” on the competitiveness of their businesses. The secretary of health



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement