Incentives for Innovation

Rising Above the Gathering Storm called on policymakers to improve the innovation environment in the United States by strengthening intellectual property protection, making permanent the research and development tax credit and enacting other tax incentives, and ensuring ubiquitous broadband Internet access. Progress on all of these fronts has been disappointing, according to Gail Cassell, Vice President of Scientific Affairs at Eli Lilly & Company. The U.S. Patent and Trademark Office continues to be plagued by enormous backlogs of work. As a result, the PTO has tried to shift some of the work burden onto patent applicants, which has further weakened the patent system. Aspects of patent reform are being debated in Congress, but no action has yet been taken.

The record on tax incentives is worse. The existing R&D tax credit had expired and not been renewed at the time of the convocation, though it was renewed retroactively later in 2008. Other countries are offering not only R&D tax credits but other tax incentives to companies that establish or enlarge R&D operations. These incentives have contributed to decisions by U.S.-based companies to establish R&D facilities in other countries.

Finally, progress on providing more widespread broadband Internet access has been minimal. “A number of nations, as we know all too well, are ahead of the United States in providing broadband access for home, school, and business,” Cassell said.

Shortcomings in the environment for innovation in the United States are already having a major effect. For example, Barrett pointed out that Intel used to make 90 percent of its venture capital investments in the United States. Now, Intel splits its venture capital investments in half between the United States and Asia. “Anyone in the audience from the United States who says that the Chinese or Indians are not entrepreneurial, not creative, that they don’t want to rival the United States in business startups has not been to India or China,” Barrett said.

Fundamental structural deficiencies in public policies add to future uncertainties. For example, Representative Frank Wolf of Virginia warned of unfunded obligations and a “tsunami of debt” that could bankrupt the country. “In 1962, mandatory spending on Social Security, Medicare, Medicaid, and interest on the national debt comprised less than one-third of the federal budget. Today it is two-thirds,” he said. The non-defense, discretionary portion of the budget, the source of funding for many of the priorities identified in Rising Above the Gathering Storm, is gradually being crowded out. Wolf is working with other policymakers to establish a bipartisan commission charged with



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RISING ABOVE THE GATHERING STORM TWO YEARS LATER Incentives for Innovation Rising Above the Gathering Storm called on policymakers to improve the innovation environment in the United States by strengthening intellectual property protection, mak- ing permanent the research and development tax credit and enacting other tax incen- tives, and ensuring ubiquitous broadband Internet access. Progress on all of these fronts has been disappointing, according to Gail Cassell, Vice President of Scientific Affairs at Eli Lilly & Company. The U.S. Patent and Trademark Office continues to be plagued by enormous backlogs of work. As a result, the PTO has tried to shift some of the work bur- den onto patent applicants, which has further weakened the patent system. Aspects of patent reform are being debated in Congress, but no action has yet been taken. The record on tax incentives is worse. The existing R&D tax credit had expired and not been renewed at the time of the convocation, though it was renewed retroactively later in 2008. Other countries are offering not only R&D tax credits but other tax incentives to companies that establish or enlarge R&D operations. These incentives have contributed to decisions by U.S.-based companies to establish R&D facilities in other countries. Finally, progress on providing more widespread broadband Internet access has been minimal. “A number of nations, as we know all too well, are ahead of the United States in providing broadband access for home, school, and business,” Cassell said. Shortcomings in the environment for innovation in the United States are already hav- ing a major effect. For example, Barrett pointed out that Intel used to make 90 percent of its venture capital investments in the United States. Now, Intel splits its venture capital investments in half between the United States and Asia. “Anyone in the audience from the United States who says that the Chinese or Indians are not entrepreneurial, not cre- ative, that they don’t want to rival the United States in business startups has not been to India or China,” Barrett said. Fundamental structural deficiencies in public policies add to future uncertainties. For example, Representative Frank Wolf of Virginia warned of unfunded obligations and a “tsunami of debt” that could bankrupt the country. “In 1962, mandatory spending on Social Security, Medicare, Medicaid, and interest on the national debt comprised less than one-third of the federal budget. Today it is two-thirds,” he said. The non-defense, discretionary portion of the budget, the source of funding for many of the priorities identified in Rising Above the Gathering Storm, is gradually being crowded out. Wolf is working with other policymakers to establish a bipartisan commission charged with 14

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Accelerating Progress Toward a Brighter Economic Future making a set of recommendations on government funding that would be subject to a sin- gle up-or-down vote, similar to the commission asked to designate military bases for closing. Without such a step, said Wolf, “I can’t help but wonder what sort of future today’s partisan Washington is leaving to our children and grandchildren.” In addition to its weaknesses, the United States has particular strengths in innovation, speakers at the convocation noted. One is our historical openness to new immigrants and new ideas. “Openness has traditionally been the sign of our confidence,” said Secretary of Commerce Carlos Gutierrez. “When we are confident as a nation, when we know we can compete, we are open. I’m talking about openness to investments, openness to trade, and openness to people. We have always been at our best when we have been open.” The United States also has a long history of successful innovation. Many companies based on new technologies that became world leaders were founded in the United States. Today, U.S. companies and the U.S. From left to right, Sec. Margaret Spellings, workforce continue to have a flexibility that is needed to adapt to new circumstances. Sec. Samuel Bod- Teams of “scientists, engineers, marketers, managers, distributors, and creative thinkers” man, and Sec. Carlos Gutierrez can be founts of creativity, said Deborah Wince-Smith, President of the Council on Competitiveness. “Let me also make the case that marketing, entertainment, artists, cul- tural anthropologists, even archeologists — people who look at the world in a different way — need to be brought together as part of our skill base.” A history of cooperation between the public sector and private sector is another great strength of the U.S. innovation system. “Maybe that is the secret of our success,” said Sen. Hutchison. “Our academics are not just sitting in ivory towers talking to each other. They’re talking to people in the private sector who are doing research or thinking of ideas.” SEMATECH, which began as a public-private collaborative effort to improve the manufacturing competitiveness of the U.S. semiconductor industry, is an excellent exam- ple of an effective and cooperative applied research program. According to George Scalise, President of the Semiconductor Industry Association, “The consortium included semiconductor component, semiconductor equipment, and materials suppliers in a suc- 15

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RISING ABOVE THE GATHERING STORM TWO YEARS LATER cessful effort that developed the tools and processes that vaulted the United States into the technology and market share leadership of the worldwide component and equip- ment industries.” State Initiatives Another bright spot for innovation in the United States has been an upsurge of activ- ity in the states. “If the federal government is stuck in the red zone, I’d say the states are scoring touchdowns right now,” said University of Michigan President Emeritus James Duderstadt. “There is considerable activity at the state level, particularly in STEM educa- tion at the K-12 level, in higher education, and in research.” The most successful states have had leadership from their gover- nors and a long-term strategic framework with short-term actions that can be embraced, according to Duderstadt. Important ideas often bub- ble up from the grassroots level, and leadership at the top is needed to implement those ideas. Grassroots political activities are also crucial for building awareness of state programs and for bringing pressure to bear on federal policymakers. For example, advisory groups drawing from the business community, higher education, the media, and other groups can have an important influence on state policy. Some state policies may involve paradigm shifts, according to Duderstadt. Examples include moving to 12-month appointments for teachers or distributing some federal research support to build capacity as well as to take advantage of established capacity. Representative States also have made progress by sharing successful strategies among themselves. Bart Gordon And federal policymakers can learn important lessons from the states. “Frequently what happens in the states leads what happens in this town,” said Duderstadt. 16

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Accelerating Progress Toward a Brighter Economic Future Whether we are in the private sector or in Intellectual property is a key element in our academia, the non-profit world or in govern- nation’s economic expansion and has helped ment, we all have a responsibility to make the make American workers the most productive case for the power of innovation to address in the world. Almost one-half of our economy our most pressing challenges, be they to our is somehow tied to intellectual property. national security, to our health and well-be- —CARLOS GUTIERREZ, Secretary of the Department ing, or to our economic competitiveness. of Commerce —SAMUEL BODMAN, Secretary of the Department of Energy The bottom line is that other nations are fol- There is a lot happening in states and in lowing our lead and catching up. Not only are industries that is coming up as opposed they making research a high priority but they to coming down from Washington. are providing incentives to stimulate innova- —TOM LUCE, Chief Executive Officer of the tion in the private sector and to lure mem- National Math and Science Initiative bers of the U.S. private sector — and, I might add, our scientists — to their countries. —GAIL CASSELL, Vice President of Scientific Affairs for Eli Lilly I truly believe we need a White House Council on Innovation and Competitiveness, not an innovation foundation that is housed in one agency or department. The White House provides the cross- cutting analysis and integration of all agencies, so that tax policy, regulation, R&D investment, and workforce training can be aligned for the nation and the innovation economy. —DEBORAH WINCE-SMITH, President of the Council on Competitiveness 17