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Overview
America’s position as the source of much of the world’s global
innovation has been the foundation of its economic vitality and military power
in the post-War era. No longer is U.S. pre-eminence assured as a place to turn
laboratory discoveries into new commercial products, companies, industries, and
high-paying jobs. As the pillars of the U.S. innovation system erode through
wavering financial and policy support, the rest of the world is racing to improve
its capacity to generate new technologies and products, attract and grow existing
industries, and build positions in the high technology industries of tomorrow.
Sustaining global leadership in the commercialization of innovation is
vital to America’s security, its role as a world power, and the welfare of its
people. Even in a climate of severe budgetary constraint, the United States
cannot afford to neglect investing in its future. These are investments, moreover,
that will pay for themselves many times over.
The second decade of the 21st century is witnessing the rise of a global
competition that is based on innovative advantage. To this end, both advanced as
well as emerging nations are developing and pursuing policies and programs
that are in many cases less constrained by ideological limitations on the role of
government and the concept of free market economics. Not only have these
nations placed massive bets on research and higher education, they have also
unveiled comprehensive national strategies to build innovation-led economies.
Governments everywhere are adopting, adapting, and in some cases improving
aspects of America’s innovation ecosystem that have long been the envy of the
world, such as close collaboration between universities and business, deep pools
of risk capital, and effective programs that encourage researchers to start up
their own companies. Going beyond, some countries are pursuing a highly
interventionist and essentially mercantilist set of innovation policies and
programs.
The rapid transformation of the global innovation landscape presents
tremendous challenges as well as important opportunities for the United States.
Emerging powers such as China and India have critical masses of highly
educated scientists and engineers, rising R&D spending, and large, rapidly
growing domestic markets for high-tech products. Innovation hubs such as
1
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2 RISING TO THE CHALLENGE
Silicon Valley, greater Boston, San Diego and Austin that have been magnets
for the world’s brightest and most visionary innovators, technology
entrepreneurs, and investors face greater competition from dynamic new
commercialization zones, such as Taipei, Shanghai, Helsinki, Tel Aviv, and
Bangalore.
The world of innovation itself is undergoing radical change, calling into
question America’s ability to benefit fully from U.S. science and technology
leadership. In today’s world, knowledge, money, and people flow across borders
with ever-greater speed and ease, often through open collaborative innovation
networks linking corporations, researchers, investors and institutions. The good
news is that this opens genuine opportunities for international collaboration that
can help solve global health, environment, and energy challenges, as well as
enable companies to accelerate product development.
But the globalization of innovation capacity is also undermining
traditional assumptions that have guided U.S. policymaking for the past six
decades. In particular, it no longer follows that discoveries and inventions
flowing from research conducted by America’s universities, corporations and
national laboratories will naturally lead to products that are commercialized and
industrialized on U.S. shores. Although the U.S. federal government remains the
biggest sponsor of basic research, spending some $148 billion on public R&D in
2011, traditional trading partners and emerging economies are concentrating
their energies on translating new technologies from every available source into
industrial applications and job-generating industries. In some cases, nations are
using the resources of the state to induce U.S. companies to manufacture their
innovations locally and transfer proprietary technologies while giving
homegrown champions privileged access to their domestic markets. In other
cases, companies produce offshore because they conclude the United States
simply lacks the supply chain capacity, technical skills, and the right investment
climate for high-volume manufacturing. As a result, the U.S. is finding it
increasingly difficult to capture the economic value generated by its tremendous
public and private investments in R&D.
The United States urgently needs to adjust to the new great game [or
challenge] of 21st century global competition. Just as the 2007 National
Academies report Rising Above the Gathering Storm was a call to arms that
urged the U.S. to increase investment in R&D, education, and other inputs into
the innovation system, this report argues that far more vigorous attention be paid
to capturing the outputs of innovation -- the commercial products, the industries,
and particularly high-quality jobs to restore full employment. America’s
economic and national security future depends on our succeeding in this
endeavor.
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OVERVIEW 3
THE NEW INNOVATION LANDSCAPE
The search for a new U.S. innovation policy should begin with an
understanding of America’s changing competitive position as compared with the
rest of the world. Over the past several years, the Board on Science,
Technology, and Economic Policy of the National Academies has engaged in an
extensive dialogue on science, technology and innovation policy with countries
that place a high priority on innovation. America’s competitive challenge comes
into clearer focus when the strong measures taken by other nations to improve
their innovation capacity are contrasted directly with the flagging U.S.
commitment in many of the same areas. For example:
Support for the Pillars of Innovation:
• R&D Investment: The U.S. is losing its once-overwhelming
advantage in research. The U.S. share of global R&D spending dropped
from 39 percent in 1999 to 34.4 percent in 2010. This is still very
substantial, but trends suggest the U.S. share will continue to shrink.
While American R&D spending has risen 3.2 percent a year on average
for the past decade, for example, growth in South Korea has averaged 8
percent annually and China has averaged 20 percent. Brazil nearly
tripled R&D spending between 2000 and 2008, and Singapore plans to
triple spending between 2010 and 2015. U.S. federal spending on basic
research as a percentage of GDP, which is critical to future
technological progress, has virtually stagnated for the past 20 years and
risks actual decline in the face of current fiscal pressures.
• University Funding: Research universities—the engines of the U.S.
innovation system—are suffering severe cutbacks across the U.S. due
to state budgetary constraints. Other nations and regions are
dramatically increasing funding to upgrade, expand, and open new
research universities. China is spending billions to make 39 universities
world leaders. India’s five-year plan calls for 1,500 new universities
and a number of new elite technology institutes. And Taiwan plans to
invest $1.7 billion to develop world-class universities.
• Early-Stage Finance: Funding from angel investors and venture
capitalists, another pillar of America’s innovation ecosystem, has fallen
sharply since 2000 (albeit a peak year), and venture capital investors
have grown steadily more risk-averse, putting less funding in the early-
stage investments. But successful U.S. programs, such as the Small
Business Innovation Research (SBIR) program, that are important
sources of early-stage funding have struggled for reauthorizations.
Others, such as NIST’s Advanced Technology Program, now the
Technology Innovation Program (TIP), have struggled for renewed
funding. Meanwhile, other nations have launched large funds to support
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4 RISING TO THE CHALLENGE
start-ups. Japan, Brazil, the United Kingdom, Sweden, India, the
Netherlands, Germany, and other nations have adopted programs that
often are modeled directly on SBIR or other U.S. policies and address
the early-stage funding challenge in the innovation chain.
• Talent: Singapore, Canada, and China are among the nations that are
attracting star scientists from around the world to their universities and
research institutes by offering high salaries and opportunities to run
well-funded programs. In the U.S., foreign-born U.S. science and
technology graduates and entrepreneurs often face great difficulty
obtaining U.S. residency visas and citizenship. Others are investing
more in their existing workforce. Germany, for example, is a pathfinder
in high-skilled worker training and retention, including dealing with the
both the challenge and opportunities presented by an aging population.
By contrast, the U.S. lacks any systematic worker-retraining program in
an age of drastic technological change.
Efforts to Capture Economic Value:
• Manufacturing. U.S. is losing competitiveness as a location for new
investment in advanced manufacturing capacity, even in industries
where the U.S. is at the technological forefront, driven in part by
national policies. This continued erosion of America’s high-tech
manufacturing base threatens to undermine U.S. leadership in next-
generation technologies. Major U.S. trading partners understand that a
domestic industrial base that can produce advanced products in high
volumes is integral to maintaining global competitiveness in innovation
and next-generation technologies. Nations and regions as diverse as
Germany, Japan, Taiwan, and South Korea are showing it is possible to
remain successful exporters in advanced manufacturing despite
relatively high labor costs. The U.S. high-tech manufacturing base, by
contrast, has deteriorated to the point that it is sometimes difficult to
manufacture in high volumes the products that are invented in the
United States —even when labor costs are not a major factor. While
many other nations support high-volume manufacturing with tax
holidays, grants and credit, U.S. federal incentive programs have short
time horizons, limited scope, and uncertain future funding prospects.
• Translational and Applied Research: In a time of intense
technological change, large, well-funded public-private partnerships
such as Germany’s Fraunhofer-Gesellschaft, Korea’s Electronics and
Telecommunications Research Institute, Taiwan’s ITRI, and Finland’s
Tekes have proven remarkably successful at helping domestic
manufacturers translate new technologies into products and production
processes. Although the U.S. has many applied-research programs, we
lack a systematic institutional focus on developing manufacturing
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OVERVIEW 5
industries at scale for new technology products and or to reinforcing
and stimulating the growth of broad industrial clusters.
• Cluster Development: Governments around the world are investing
aggressively in comprehensive strategies to foster regional innovation
clusters. Prominent government-supported successes include the
semiconductor, digital display, and notebook PC clusters in Taiwan;
telecommunications in Finland; biomedical research in Singapore;
micro-electronics in Grenoble, France; and life sciences and
information technology in Shanghai’s Pudong district. Many promising
innovation-cluster initiatives have been launched by U.S. state and
local governments, including nano-electronics in upstate New York,
advanced batteries in Michigan, flexible electronics in northern Ohio,
and biometrics in West Virginia. Unlike in other nations, however,
many of these initiatives receive little federal policy or financial
support—and new federal initiatives are often small.
Efforts to Enhance National Advantage:
• Framework Conditions: The United States still offers one of the
world’s best environments for commercializing products and launching
companies, including strong protection of intellectual property rights,
temperate bankruptcy laws, well-developed capital markets, and
extensive worker mobility. But the U.S. has not stayed abreast of other
nations in areas as diverse as tax policy, regulatory costs, and state-of-
the-art infrastructure.
• Rising Neo-Mercantilism: Countries such as China and South Korea
employ a powerful combination of state subsidies, national standards,
preferential government procurement for national firms, and
requirements for technology transfer to drive the growth of nationally-
based innovation. They also encourage state- owned or –supported
enterprises to compete globally in strategic emerging industries with
the help of low-cost loans—often with little concern for near-term
return on investment or overcapacity. In the United States, trade and
investment policy is predicated on the faith that open markets foster
innovation. What’s more, U.S. trade policy is ill-equipped to avert the
serious damage neo-mercantilism inflicts on U.S. industries until it is
too late, such as when heavily subsidized competition of a given
product forces American manufacturers to shut domestic production.
Often, U.S. companies hesitate to seek redress from the federal
government because they fear damaging their access to foreign
markets. By depriving U.S. companies of the ability to reap the
commercial rewards of their significant investments in innovation both
at home and abroad, neo-mercantilism poses serious long-term
consequences for the U.S. economy and defense capabilities.
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6 RISING TO THE CHALLENGE
RISING TO THE CHALLENGE
In this dramatically more competitive world, the United States cannot
return to a path of sustainably strong growth, much less maintain global
leadership, by living off past investments in its capacity for innovation. By
failing to make the immediate as well as long-term investments needed to ensure
that the U.S. remains a dominant location for producing technology-intensive
goods and services, we are sacrificing jobs, economic growth, living standards,
and national security. Nor can the U.S. compete on the basis of a policy
approach that is the legacy of an era when American advantages were
overwhelming and innovative activity tended to remain within our borders.
Since publication of The Gathering Storm, Congress and the White
House have taken a number of measures to shore up U.S. competitiveness in
science, technology, and economic policy, though many have lacked adequate
follow-through. The reauthorization of the America COMPETES Act, signed
into law Jan. 6, 2011, called for sharp increases in the research budgets of
federal agencies and federal funding for K-12 science, technology, and
mathematics education. However, Congress has not followed up this call with
funding and the Obama Administration has proposed flat science budgets below
the levels proposed in the legislation. The original America Competes Act also
established the Advanced Research Projects Agency-Energy (ARPA-E), which
received funding only following the passage of the American Renewal and
Reinvestment Act of 2009. In addition to funding ARPA-E, this Stimulus Bill
eased immigration rules for skilled talent, and extended billions of dollars in
grants and loans to renewable-energy, electricity-transmission, and advanced-
battery manufacturing projects, but this was a one-time event. The Obama
Administration has unveiled a national innovation strategy that calls for
increasing U.S. investments in R&D, higher education, and information-
technology and transportation infrastructure along with many other more-
targeted innovation programs, such as the National Manufacturing Initiative.
As encouraging as these actions are, they are not enough. Many of the
major proposals aimed at boosting U.S. competitiveness and reaping more of the
economic value from U.S. innovation have not been enacted into law. Most of
the new pro-innovation programs have short time horizons and may well lack
sustainable long-term funding. Federal programs also lack the scale and
comprehensive approach needed to enable America to rise to meet the acute
competitive challenges posed by the rapidly evolving global innovation
landscape. We therefore recommend the following strategy to start putting the
United States on a clear path to meeting these challenges:
In a dramatically more competitive world, the United States needs to
reinforce the traditional pillars of its economic strength and innovation
capacity. (Recommendation 2.)
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OVERVIEW 7
• Boost R&D investment: The U.S. should fund R&D at the higher
levels authorized under the America COMPETES Act and sustain these
levels in the future as part of a plan to boost private and public R&D
expenditure to a level of 3% of GDP by 2020. (Recommendation 2a.)
• Sustain University Research: Funding for university research should
be stabilized at the state and federal level and then increased. Our
capacity to train students in science, engineering and mathematics, and
in the broad range of future demands for talent, is dependent on well-
funded universities and colleges. Funding options should include
targeted business tax incentives from dedicated sources of tax revenue
as well as incentives for private donations. The government also should
reform regulations that make it increasingly expensive for universities
to conduct research. (Recommendation 2b.)
• Help Small Business: Innovative small businesses are a major source
of new job creation. However, many small firms and struggle to raise
the funds needed to develop promising new technologies because their
commercial potential is often too uncertain to attract needed private
venture capital. Proven programs such as SBIR and ATP (or its
successor, the Technology Innovation Program), which provide small
competitively based innovation awards to small firms or consortia,
should be sustained, expanded, and adequately funded. Government
agencies should also be encouraged to experiment with and evaluate
new initiatives, including prizes for technological advance. The U.S.
government should explore offering policy support for angel funds and
venture capital. (Recommendation 2c.)
• Train Workers: The federal government should expand support for
successful state and regional workforce-development programs for
advanced industries. It also could provide companies with vouchers to
cover training costs for new employees. Programs in community
colleges that provide such training need to be reinforced. To encourage
experienced talent to remain in the workforce longer, the U.S. should
remove tax disincentives for staying employed past age 65.
(Recommendation 2d.)
• Support higher education. Federal and State governments should
make sure that education in all fields, and particularly science,
technology, engineering and math, are made affordable and available to
all eligible applicants. The land grant colleges were the backbone of
the talent infrastructure for the building of America, and the Federal
role should not be abandoned now. (Recommendation 2b-i.)
• Attract Foreign Talent: Immigration laws should be reformed to
attract foreign scientists, engineers, and entrepreneurs to live and work
in the U.S. and facilitate their permanent residency and U.S.
citizenship. (Recommendation 2d-v)
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8 RISING TO THE CHALLENGE
The United States needs to adopt specific policy measures to capture
greater economic value from its public investments in research.
(Recommendation 5.)
The America COMPETES Act provides for crucial inputs into the U.S.
innovation system. But a similarly comprehensive effort needs to be made to
exploit the results of these investments in science, technology, and education
into more innovative products and well-paying jobs.
• Support Advanced Manufacturing: A 2004 report of the President’s
Council of Advisors on Science and Technology warned that “with
manufacturing leaving the country, the United States runs the risk of
losing the strength of its innovation infrastructure of design, research and
development and the creation of new products and industries.” Many
U.S. companies with important technologies cannot develop the full
infrastructure and make the high-risk, long-term investments required to
support job-creating advanced manufacturing at home. To help stem this
erosion of the nation’s manufacturing base, current manufacturing tax
credits and loan-guarantee programs should be made permanent and
expanded in scope. Manufacturing technical assistance and other
programs aimed at accelerating commercialization of new technologies
should be expanded. In particular, the recent proposal to set up a
network of Manufacturing Innovation Institutes should be fully funded.
(Recommendation 5d.)
• Leverage government procurement: Federal agencies can use their
purchasing power to help drive domestic commercialization of emerging
technologies. The U.S. government has done this many times previously
in industries such as semiconductors, computers, and aerospace. Federal
and state agencies can help build domestic markets for important new
technologies for electric-drive vehicles, energy-efficient buildings, solid-
state lighting, and next-generation photovoltaic cells. Procurement rules
of Federal agencies and armed forces should be reformed to put more
emphasis on providing incentives for spurring innovation in products and
processes that result in continuous performance improvements and lower
long-term life-cycle costs (vs. up-front costs). Government agencies also
should accelerate innovation by providing early-stage financial support
for small companies that can address national needs. (Recommendation
5j.)
• Foster Clusters: Recent pilot programs by federal agencies to align
current economic development programs with specific regional
innovation cluster initiatives by state and local organizations should be
assessed and, where appropriate, expanded geographically. The U.S. also
needs to assess and draw policy lessons from successful cluster efforts
and communicate best practices to those managing regional initiatives.
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OVERVIEW 9
The Federal government should award competitive grants to support
state and regional efforts to develop and sustain modern science parks
and also technology development implementation centers that are
focused on manufacturing. (Recommendation 5i)
• Strengthen University Links to the Market: University seed funds and
incubators can help start-ups spun off from research projects. Early-stage
funding programs should be expanded to support commercialization of
university research. New centers of excellence should be established to
foster university-industry-government collaboration on commercial and
industrial applications of emerging technologies. (Recommendation 5a.)
• Promote Public-Private Partnerships: The U.S. needs to expand
successful partnership programs and consider adopting and adapting
successful models from abroad, such as Taiwan’s ITRI and Germany’s
Fraunhofer Institutes. The U.S. also should assist in establishing new
public-private research and development consortia aimed at fostering the
implementation and production in the U.S. of emerging technologies in
sectors such as flexible electronics, solid-state lighting, and medical
devices. (Recommendation 5c.)
Provide a Competitive Corporate Environment: The United States should
assure that the tax framework supports new company creation and
investment. In order to be competitive with those of its major trading
partners, the U.S. should take measures to address policies that actually
disadvantage U.S.-based industry. (Recommendation 3)
Governments at the Federal and state levels should regularly benchmark tax
policies and regulatory costs against those of other nations. Where they are
found to be serious impediments to corporate investment and innovation,
every effort should be made to close gaps or seek ways to reduce the negative
impact through compensating incentives. The U.S. should consider reducing
corporate taxes and rely increasingly on consumption taxes. Efforts should be
made to ensure that changes in taxation and government spending to shrink
the federal deficit are made with a full understanding of the potential
consequences for future growth. The U.S. should also make current tax
credits for research and experimentation permanent, and incentivize
commercial credit to innovative manufacturing, particularly the scale-up of
an initial production process.
Build a 21st Century Innovation Infrastructure: The U.S. should increase
dramatically investment in state-of-the-art broadband networks and other
infrastructure required to maintain American leadership in a 21st century
global knowledge economy. (Recommendation 4.)
The U.S. should consider the feasibility of a National Infrastructure Bank that
can leverage more private investment in highways and railways, renewable-
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10 RISING TO THE CHALLENGE
energy systems, water and sewerage and other public works that both meet
critical national needs and deploy emerging technologies. The Federal
government should increase R&D investments in new materials and sensors
for highways, ports, and bridges, as well as technologies to improve energy
efficiency in buildings. Incentives to encourage expansion of the high-speed
Internet backbone should be strengthened to sharply increase broadband
penetration in homes, schools, and businesses.
Capitalize on Globalization of Innovation: The United States should
capitalize on the globalization of research and innovation to cooperate with
other nations to advance innovations that address shared global challenges in
energy, environment, health, and security.( Recommendation 7.)
Just as other nations establish R&D institutions in the U.S. and actively seek
to acquire American technology, the United States should recognize the many
opportunities presented by the rapid growth in research and innovation
activity abroad.
• Research Collaboration: The U.S. needs to strengthen and expand
research collaborations with growing economies such as China, India,
and Brazil; new European Union members such as Poland, the Czech
Republic, and Hungary; and historical partners like Sweden, Germany,
and Japan to advance research that can lead to innovations in
biomedicine, energy, environment, security, and other shared global
challenges. To stay abreast of important technological developments
abroad, the United States should expand exchanges of researchers,
scholars, and students, and support these objectives. (Recommendation
7a.)
• Network and Engage Globally. We now operate in global systems of
innovation and new knowledge creation. Leading scientists at
American universities work in collaborative teams and cohorts that are
multinational and dispersed across the globe joined together by strong
information technology networks. We need to better leverage these
networks and capture value from them. (Recommendation 7b.)
Monitor and Evaluate Investments, Measures, and Innovation Policies
of other Nations: In a world where other nations are investing very
substantial resources to create, attract and retain the industries of today and
tomorrow, the United States needs to increase its understanding of the
swiftly evolving global innovation environment and learn from the policy
successes and failures of other nations (Recommendation 1.)
The United States needs to understand the swiftly evolving global
innovation environment and the implications for America’s competitive
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OVERVIEW 11
position and national security. The government should, as a priority, gather
current information and assess current implications for the U.S. economy of
foreign programs, and at the same time maintain and support regular, on-
going efforts to engage with policymakers, business leaders, and academics
from around the world. These steps will enable the benchmarking of U.S.
policies, programs and measures in light of those of other countries. The
U.S. needs to be able to draw upon international best practices aimed at
advancing innovation in order to inform its own policies and programs and
understand the potential impact of these programs on U.S. industries.
Recognize that Trade and Innovation are Closely Linked:
(Recommendation 6.) It is the responsibility of the U.S. government to
provide a rules-based global playing field for its industries. Foreign trade-
and investment-distorting measures should be rooted out or offset,
especially when U.S. innovation will be stifled. This will require support
Box O-1
Four Core Goals
1. Monitor and learn from what the rest of the world is doing: The United
States needs to increase its understanding of the swiftly evolving global
innovation environment and learn from the policy successes and failures of
other nations. It is generally recognized that there is much to be learned
from the rest of the world in science. This is equally true with regard to
innovation policy. See Recommendation 1.
2. Reinforce U.S. innovation leadership: It is very important that the United
States reinforce the policies, programs, and institutions that provide the
foundations for our own knowledge-based growth and high value
employment. These include measures to strengthen our research
universities and national laboratories, renew our infrastructure, and revive
our manufacturing base. See Recommendations 2, 3, and 4.
3. Capture greater value from its public investments in research: The
United States should improve its ability to capture greater value from its
public investments in research. This includes reinforcing cooperative
efforts between the private and public sectors that can be grouped under the
rubric of public-private partnerships, as well as expanding support for
manufacturing. See Recommendations 5 and 6.
4. Cooperate more actively with other nations: In an era of rapid growth in
new knowledge that is being generated around the world, the United States
should cooperate more actively with other nations to advance innovations
that address shared global challenges in energy, health, the environment,
and security. See Recommendation 7.
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12 RISING TO THE CHALLENGE
from U.S. industry, but ultimately be founded on an independent and well-
informed judgment on the part of the U.S. government as to the policy
responses that are in the national interest. The United States government
should begin to focus attention on the composition of its economy and the
extent to which it is being shaped by foreign industrial and trade policies.
Based on intelligence gathered as recommended in this report, and without
waiting for the filing by private parties of trade cases, the U.S. government
should determine whether the national interest requires that solutions need
to be put into place. It needs to vigorously pursue changes in policies of
other governments that are harmful to the U.S. industrial base and
innovation process and, where policies cannot be changed, offset them with
trade measures or financial support for affected domestic industries as
necessary.
In addition, every new U.S. international trade or investment agreement
should include a comprehensive code of conduct governing the commercial
activities of state-owned enterprises, holding their governments accountable
for behavior that undermines fair competition and deprives other nations of
the economic benefits of their investments in innovation.
CONCLUSION
The U.S. innovation system still enjoys many advantages: the world’s
largest research infrastructure, a number of the world’s greatest universities, the
deepest capital markets, and a highly dynamic ecosystem for knowing how to
turn inventions into products and businesses. But in a world where other
countries are rapidly developing their own innovation capacities, these
advantages alone will not guarantee America’s future competitive advantage.
Other governments are assertively shaping policies and programs to
change the competitive landscape in their favor. U.S. policies and programs are
based on a historical position of national leadership and endowment following
World War II that has long since been replaced by a broad equilibration of
technical and economic capabilities and fundamental changes in the ways in
which technologies are developed and implemented. The U.S., while retaining
vestiges of its leadership position, should recognize that merely maintaining the
current policies and programs will lead to continued erosion of our economic
capabilities, especially in high technology industries that are the basis for future
prosperity.
The U.S. has every opportunity to secure its economic leadership and
national security well into the future. But it will require a fresh policy approach,
one that ensures that the United States can compete, cooperate, and prosper in
this new world of competitive innovation. The recommendations of this report
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OVERVIEW 13
strongly urge a reformulation of U.S. innovation policies to address this
changing competitive environment.
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PART I
THE INNOVATION
CHALLENGE
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