Chapter 2

Sustaining Leadership in Innovation

The United States faces new competitive challenges in the 21st century. Globalization is diminishing what once were overwhelming American advantages as the prime location for creating, commercializing, and industrializing technology. Basic research and world-class engineering talent now are highly dispersed around the world, especially in important fields such as nanotechnology, computer science, and renewable energies. How, then, must the U.S. adapt to maintain its leadership in innovation?

IMPROVING FRAMEWORK CONDITIONS

One of America’s most fundamental strengths as a place to commercialize innovation has been its overall investment climate. For much of the post-war era, America’s boasted some of the world’s best transportation, energy, and communication infrastructure.1 In the 1980s, America’s corporate tax rates were among the lowest in the industrialized world.2 The U.S. also has had one of the world’s strongest legal systems for protecting intellectual property rights.3

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1 Michael Porter observed that American communication, power transportation, and transportation infrastructure was “arguably the best in the world” after World War II, and the fact that infrastructure companies were privately owned “was a stimulus to investment and innovation.” See Michael E. Porter, The Competitive Advantage of Nations, New York: Simon and Schuster, 1990, p. 297.

2 The U.S. statutory corporate tax rate dropped from 52 percent to 35 percent in the 1980s, well below the average for OECD nations. See Congressional Budget Office, “Corporate Income Tax Rates: International Comparison,” November 2005 (http://www.cbo.gov/ftpdocs/69xx/doc6902/1128-CorporateTax.pdf). Data from M. P. Devereaux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and International Tax Competition,” Economic Policy, vol. 35 (October 2002).

3 The United States still has the lowest rate of computer software piracy in the world, followed by Japan and Luxembourg, according to the International Data Corporation (IDC). See Business



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Chapter 2 Sustaining Leadership in Innovation The United States faces new competitive challenges in the 21st century. Globalization is diminishing what once were overwhelming American advantages as the prime location for creating, commercializing, and industrializing technology. Basic research and world-class engineering talent now are highly dispersed around the world, especially in important fields such as nanotechnology, computer science, and renewable energies. How, then, must the U.S. adapt to maintain its leadership in innovation? IMPROVING FRAMEWORK CONDITIONS One of America’s most fundamental strengths as a place to commercialize innovation has been its overall investment climate. For much of the post-war era, America’s boasted some of the world’s best transportation, energy, and communication infrastructure.1 In the 1980s, America’s corporate tax rates were among the lowest in the industrialized world.2 The U.S. also has had one of the world’s strongest legal systems for protecting intellectual property rights.3 1 Michael Porter observed that American communication, power transportation, and transportation infrastructure was “arguably the best in the world” after World War II, and the fact that infrastructure companies were privately owned “was a stimulus to investment and innovation.” See Michael E. Porter, The Competitive Advantage of Nations, New York: Simon and Schuster, 1990, p. 297. 2 The U.S. statutory corporate tax rate dropped from 52 percent to 35 percent in the 1980s, well below the average for OECD nations. See Congressional Budget Office, “Corporate Income Tax Rates: International Comparison,” November 2005 (http://www.cbo.gov/ftpdocs/69xx/doc6902/11- 28-CorporateTax.pdf). Data from M. P. Devereaux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and International Tax Competition,” Economic Policy, vol. 35 (October 2002). 3 The United States still has the lowest rate of computer software piracy in the world, followed by Japan and Luxembourg, according to the International Data Corporation (IDC). See Business 61

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62 RISING TO THE CHALLENGE Corporate Taxes: There are concerns that America now is at a competitive disadvantage in some of these areas.4 After the U.S. cut corporate taxes in the 1980s, other industrialized nations cut taxes even further. When state corporate taxes are taken into account, the U.S. corporate statutory rate of 39.3 percent is third highest among OECD nations, which have a median rate of 33 percent.5 What’s more, the tax codes of countries such as Germany, Singapore, Malaysia, and China favor investment in certain industries through such incentives as 10-year tax holidays. While U.S. states offer such tax breaks, the federal government does not. The U.S. is one of the few major trading nations with a tax code that does not treat investment in globally traded industrial activity any differently than non-mobile activity.6 This means “inefficiency and biases in the corporate tax code fail to promote the productivity and innovative capability of businesses in America, hampering the economy and indirectly affecting all Americans.” 7 Business advocacy groups argue that executives find the current tax burden to be an impediment to the competitiveness of their companies operating in the United States.”8 Infrastructure: Some analysts regard America’s aging infrastructure as a competitive disadvantage.9 The U.S. ranks only No. 27 in terms of infrastructure, according to the World Economic Forum, a major factor in America’s falling place in the WEF’s overall global competitiveness rankings.10 That compares to seventh place in 2000, observes the McKinsey Global Institute.11 The American Society of Civil Engineers asserts that most of America’s infrastructure is in poor shape due to delayed maintenance and lack Software Alliance and IDC, 08 Piracy Study, May 2009, (http://portal.bsa.org/globalpiracy2008/studies/globalpiracy2008.pdf). 4 It is important to note that the Committee did not conduct a study comparing the U.S. tax system to that of other countries. The Committee did want to draw attention to the growing body of evidence that, in some cases, U.S. tax policy creates a less competitive environment. 5 Congressional Budget Office, op. cit., citing data from Devereaux, Griffith, and Klemm. 6 Robert D. Atkinson, “Effective Corporate Tax Reform in the Global Innovation Economy,” The Information Technology & Innovation Foundation, July 2009, (http://www.itif.org/files/090723_CorpTax.pdf) 7 Ibid. 8 Roth, et al, “2010 Global Manufacturing Competitiveness Survey,” Deloitte Touche Tohmatsu and U.S. Council on Competitiveness, June 2010. 9 For an analysis of the positive link between good infrastructure and innovation and development, see Tony Ridley, Lee Yee-Cheong, Calestous Juma. “Infrastructure, Innovation, and Development,” International Journal of Technology and Globalisation, Volume 2, Number 3-4/2006, Pages 268- 278. For an industry view, see the interview with Eric Spiegel, the president and CEO of Siemens Corporation in Harvard Business Review, “Investing in Infrastructure Means Investing in Innovation.” March 15, 2012. 10 World Economic Forum, Global Competitiveness Report, op. cit. 11 James Manyika, et al., Growth and Renewal in the United States: Retooling America’s Economic Engine, McKinsey Global Institute, February 2011, (http://www.mckinsey.com/mgi/publications/growth_and_renewal_in_the_us/pdfs/MGI_growth_an d_renewal_in_the_us_full_report.pdf).

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SUSTAINING LEADERSHIP IN INNOVATION 63 of modernization.12 The Society reports that an estimated 25 percent of America’s bridges need significant repairs, one-third of major roadways are in substandard condition, and that “America’s sewer systems spill an estimated 1.26 trillion gallons of untreated sewage every year.”13 More recently the Society called for investments in the nation’s transmission, generation, and distribution systems in order to prevent significant costs to businesses and households.14 Likewise, a bipartisan study of America’s aging transportation infrastructure concluded that it is in “bad shape.” The poor condition “compromises our productivity and ability to compete internationally,” it added. The study estimated the U.S. needs to spend $134 billion to $262 billion per year more than current plans call for until 2035 to get this infrastructure into proper condition.15 Other nations are investing aggressively to build and upgrade their transportation infrastructure. China spent $713 billion--twice as much as the U.S.--just on transportation and water infrastructure over the past five years16 and is investing an estimated $500 to 700 billion to build the world’s biggest high-speed rail network.17 In 2008, the European Investment Bank lent 58 billion Euros ($81 billion) to finance infrastructure projects, and had a target of $112 billion in 2009. 12 ASCE has assigned a C grade to bridges, C- to rail, D+ for energy, D for aviation, dams, transit, dams, and D- to drinking water. See American Society of Civil Engineers, 2009 Report Card for America’s Infrastructure, March 25, 2009, (http://www.infrastructurereportcard.org/sites/default/files/RC2009_full_report.pdf). 13 Data from U.S. federal agencies cited in Eric Kelderman, “Look Out Below! American’s Infrastructure is Crumbling,” Stateline.org, Pew Research Center, January 22, 2008, (http://pewresearch.org/pubs/699/look-out-below). 14 ASCE, Failure to Act: The Economic Impact of Current Investment Trends in Electricity Infrastructure. April, 2012. 15 See Miller Center of Public Affairs, Well Within Reach: America’s New Transportation Agenda, David R. Goode National Transportation Policy Conference. Posted on October 4, 2010 at http://www.infrastructureusa.org/well-within-reach/. 16 Cathy Yan, “Road-Building Rage to Leave U.S. in Dust,” Wall Street Journal, January 18 2011. 17 See Sean Tierney, “High-speed rail, the knowledge economy, and the next growth wave,” Journal of Transport Geography, Volume 22, May 2012, pages 285-287. Tierney notes that failure to invest in economic development “concedes considerable ground to those countries with whom we are trying to compete. Compare the $8 billion that President Obama set aside in the stimulus bill as a down payment for HSR [High Speed Rail], with the estimated $500 - $700 billion that China plans to invest for its 19,000 km HSR network.” For a review of the economic benefits of large scale transportation projects, see T.R. Lakshmanan, “The broader economic consequences of transport infrastructure investments.” Journal of Transport Geography. Volume 19(1), 2011. For a review of recent China’s investments in rail, Will Freeman, “The Big Engine That Can: China’s High-Speed Rail Project,” China Insight Economics, May 28, 2010. Problems have emerged with regard to the rapid construction of China’s rail network, its cost, the revenues it is generating, and its relevance to the needs of the general population. Recent train disasters in China have further spotlighted challenges related to the rapid growth of that nation’s high-speed rail system. See Financial Times, “China’s Rail Disaster.” July 27, 2011 and Keith B. Richburg, “Are China’s High-Speed Trains Heading Off the Rails?” Washington Post, April 23, 2011.

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64 RISING TO THE CHALLENGE To address this competitive disadvantage in infrastructure, some analysts have called for a U.S. infrastructure bank that, like the EIB, could leverage private capital.18 The purpose of such a National Infrastructure Bank (NIB) would be to invest in merit-based projects of national significance that span both traditional and technological infrastructure by leveraging private capital. Phillips, Tyson and Wolf argue that “the NIB could attract private funds to co-invest in projects that pass rigorous cost-benefit tests, and that generate revenues through user fees or revenue guarantees from state and local governments. Investors could choose which projects meet their investment criteria, and, in return, share in project risks that today fall solely on taxpayers.”19 Energy Efficiency: Reliable, clean, and relatively inexpensive energy has long been an important competitive advantage for the United States. As a recent UNIDO report notes, “Energy efficiency contributes toward reducing overall company expenses, increases productivity, has effects on competitiveness and the trade balance on an economy-wide level, and, by creating a home market for energy efficient technologies, supports the development of successful technology supply industry in that field.”20 Energy efficiency also represents a major opportunity to increase energy security while also limiting carbon dioxide emissions. An accelerated deployment of existing and emerging energy-supply and end-use technologies has the potential to yield substantial improvements to energy conservation and efficiency.21 America’s buildings, which alone use more energy than any other entire economy of the world except China, are a key area for conservation efforts.22 U.S. buildings are generally grossly inefficient; it has been widely documented that energy use in new and existing buildings can be cut by 50% or more cost-effectively. 23 Lowering the cost base for location of 18 Felix Rohatyn, The Case for an Infrastructure Bank, Wall Street Journal, September 15, 2010. In the U.S. Senate, legislation, known as the “BUILD Act, was introduced on May 15, 2011 to fund an infrastructure bank. 19 See Charles Phillips, Laura Tyson, and Robert Wolf, “The U.S. Needs an Infrastructure Bank,” Wall Street Journal, January 15, 2010. 20 Wolfgang Eichhammer and Rainer Walz, “Industrial Energy Efficiency and Competitiveness,” Vienna: United Nations Industrial Development Organization, 2011. 21 See National Academy of Sciences, et al., America’s Energy Future, Technology and Transformation, Washington, DC: The National Academies Press, 2009. The report notes that “The deployment of existing energy efficiency technologies is the nearest-term and lowest-cost option for moderating our nation’s demand for energy, especially over the next decade. The committee judges that the potential energy savings available from the accelerated deployment of existing energy- efficiency technologies in the buildings, transportation, and industrial sectors could more than offset the Energy Information Administration’s projected increases in U.S. energy consumption through 2030.” 22 U.S. Green Building Council, “Buildings and Climate Change,” Accessed on November 3, 2011 at http://www.documents.dgs.ca.gov/dgs/pio/facts/LA%20workshop/climate.pdf. 23 Greg Kats, Greening Our Built World, Costs, Benefits, and Strategies, Washington, DC: Island Press, 2010.

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SUSTAINING LEADERSHIP IN INNOVATION 65 production in the United States can be fostered by improving conservation, and the techniques learned are themselves marketable globally as innovative services. Broadband: The U.S. is regarded as lagging in broadband infrastructure. In the U.S., 27 of every 100 households subscribe to high-speed Internet service. In Germany, broadband penetration is at 30 percent. The rate is 31 percent in France, 34 percent in South Korea, 38 percent in Denmark, and 41 percent in Sweden.24 While recognizing that a number of these countries do not have the same geographical spread as the United States, the McKinsey Global Institute nonetheless estimates that the U.S. loses $450 billion in purchasing power annually due to subpar Internet connections.25 Intellectual Property: The U.S. still has one of the best legal systems in the world to protect intellectual property rights. This has made America a leader in IP-intensive industries such as pharmaceuticals, software, and entertainment.26 NDP Consulting estimates that workers in IP-intensive industries generate more than twice the output and sales per employee than do workers in non-IP-based industries. IP-intensive industries also account for around 60 percent of U.S. exports.27 Counterfeiting and patent infringement abroad undermine the economic contribution of these industries, however. An estimated 80 percent of software used in China is pirated, IDC estimates. The piracy rate stands at 61 percent in the entire Asia-Pacific region, 65 percent in Latin America, and 66 percent in Central and Eastern Europe, compared to 21 percent in North America.28 This level of piracy has a substantial effect on U.S. companies’ revenues, and therefore their long-term capacity to innovate and compete. SUBSTANTIALLY INCREASING R&D FUNDING As mentioned above, the United States still enjoys a clear lead over other nations in total R&D spending. [See Figure 2.1] But as also noted earlier, 24 International Telecommunication Union and Federal Communications Commission data cited in Manyika, op. cit. 25 Ibid. 26 In many fields intellectual property protection plays only a small role in enabling firms to reap returns from their innovations. And in some fields it would appear that for the industry as a whole aggressive patenting is a negative sum game. For a survey of the economic literature, both theoretical and empirical, on the choice of intellectual property protection by firms, see Bronwyn H. Hall, Christian Helmers, Mark Rogers, and Vania Sena, “The Choice between Formal and Informal Intellectual Property: A Literature Review,” NBER Working Paper No. 17983, April 2012. 27 See Nam d. Pham, “The Impact of Innovation and the Role of Intellectual Property Rights on U.S. Productivity, Competitiveness, Jobs, Wages, and Exports,” NDP Consulting, April 2010 (http://www.theglobalipcenter.com/sites/default/files/reports/documents/IP_Jobs_Study_Exec_Sum mary.pdf). 28 Business Software Alliance and IDC, 08 Piracy Study, May 2009, (http://portal.bsa.org/globalpiracy2008/studies/globalpiracy2008.pdf).

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66 RISING TO THE CHALLENGE Others ($147 billion) U.S. Other Europe ($415 billion) ($141 billion) India ($33 billion) U.K. ($39 billion) France ($47 billion) Korea ($49 billion) Germany ($83 billion) China ($149 billion) Japan ($148 billion) FIGURE 2.1 Total global R&D spending reached $1,252 billion in 2010. SOURCE: Battelle and R&D Magazine, 2012 Global R&D Funding Forecast, December 2011. this lead is eroding as other nations dramatically increase their investments in research—both in real terms and as a percentage of GDP. The most dramatic gains are being made by China. R&D spending as a percentage of GDP rose from only 0.6 percent in 1996 to 1.7 percent in 2009—a period during which China’s economy grew by an astounding 12 percent a year.29 Between 2002 and 2007, the percentage of the world’s researchers living in China rose from 13.9 percent to 19.7 percent.30 Since then, China has continued to increase R&D investment by around 10 percent a year, even during the global recession. China’s long-term plans call for boosting R&D to 2.5 percent of GDP by 2020.31 The government also has set an ambitious target of 29 National Science Foundation Science and Engineering Indicators: 2010 and Ministry of Science and Technology of the People’s Republic of China, China S&T Statistics Data Book 2010, Figure 1- 1. 30 UNESCO Science Report 2010, Paris: United Nations Educational, Scientific and Cultural Organization. Access at http://unesdoc.unesco.org/images/0018/001899/189958e.pdf . 31 China State Council, “National Medium- and Long-Term Program for Science and Technology,” op. cit.

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SUSTAINING LEADERSHIP IN INNOVATION 67 Box 2.1 The European Union’s Growing Investments in Research and Innovation Complementing the rising R&D expenditures of its member states, the European Union is dramatically increasing its investments in research and innovation. The new Horizon 2020 program, which succeeds the Seventh Framework Program, will invest 80 billion Euros over seven years, beginning in 2013, an increase of some 45 percent. This includes a dedicated budget of € 25 billion to strengthen the EU’s position in science; € 18 billion to strengthen Europe’s industrial leadership in innovation including greater access to capital and support for SMEs; and € 32 billion to help address global challenges such as climate change, renewable energy, and health care.32 According to the European Commissioner for Research, Innovation, and Science Máire Geoghegan-Quinn, the goal of the Horizon 2020 program is designed to transform Europe’s “world-class science base into a world-beating one.”33 producing 2 million patents of inventions, utility models, and designs annually by 2015.34 Investment in R&D has risen sharply in other nations as well. Japanese spending on research and development surged from 2.9 percent of GDP in 1995 to 3.6 percent in 2009.35 India doubled national R&D spending between 2002 and 2008, to Rupees 378 billion ($8.7 billion) annually36, and plans another 220 percent increase by 2012.37 South Korea has boosted R&D spending by an average of 10 percent annually from 1996 to 2007,38 and reportedly plans to increase the R&D-to-GDP ratio from an already-high 3.2 percent to 5 percent by 2012.39 Brazil nearly tripled R&D expenditure between 2000 and 2008, to $24.4 billion.40 Finland has boosted R&D spending from 2 percent of GDP in 1991 to 32 Access at http://ec.europa.eu/research/horizon2020/index_en.cfm?pg=h2020. 33 Neil McDonald, “Euro Commissioner visits US,” Federal Technology Watch, 10(4) January 23, 2012. 34 China State Intellectual Property Office, “National Patent Development Strategy (2011-2020).” 35 Japanese Ministry of Internal Affairs and Communications, Statistics Bureau, accessed at http://www.stat.go.jp/english/data/kagaku/index.htm. Data refer to fiscal years. 36 UNESCO, UNESCO Science Report 2010, p. 371. 37 Government of India Planning Commission, “Report of the Steering Committee on Science and Technology for Eleventh Five-Year Plan (2007-2012),” December 2006. 38 Battelle, op. cit. 39 Kim Tong-hyung, “5% of GDP Set Aside for Science Research,” Korea Times, December 12, 2009. 40 Brazil Innovation Secretary Francelino Grando, “Brazil’s New Innovation System,” National Academies symposium, Clustering for 21st Century Prosperity, Washington, DC, February 25, 2010.

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68 RISING TO THE CHALLENGE 3.9 percent in 2010, one of the highest levels in the world.41 In 2006, the Singapore government tripled its five-year R&D budget and set a target of pushing national spending to 3.5 percent of GDP by 2015.42 In the United States the growth in pubic R&D funding has been more uneven. Public research spending received an $18.7 billion temporary boost under the 2009 American Recovery and Re-investment Act of 2009. Congress approved significant long-term increases to non-defense R&D investment when it passed the America COMPETES Act, which pledges to double the research budget of the NSF, the DOE’s Office of Science, and NIST over seven years. However, the COMPETES Act has not yet been funded by Congress and its prospects are uncertain in the current budgetary environment. Federal commitments to higher research spending have been flat or falling. Overall federal funding for R&D in the United States has not increased significantly since 2004, 43 and the full-year continuing resolution passed by Congress for fiscal year 2011 cut R&D spending by 3.5 percent to $144.4 billion. Under the resolution, the NIH budget was reduced by 1.1 percent, the DOE’s energy programs by 14.6 percent, the Office of Science by 1.6 percent, the NSF by 1.3 percent, and NIST by 2.5 percent.44 The Obama Administration proposed a substantial 7.3 percent increase in non-defense R&D spending for fiscal year 2011-2012. Federal support for basic and applied research, in fact, would reach its highest level in history under the proposed budget. Under the President’s plan, the NSF, NIST, and DOE would see especially large percentage increases. 45 However, fiscal challenges, precipitated by concerns about the rapid growth in the federal debt, leave the prospect of rising budgets for research and development uncertain. These developments come at a time when federal spending on R&D as a share of GDP has been in long-term decline.46 This decline has been masked by rising private-sector R&D spending, which has maintained total U.S. R&D spending as a percentage of GDP at a roughly constant level over the past few decades. [See Figure 2.2] The increased business R&D intensity has enabled 41 Statistics Finland, Science and Technology Statistics accessed at http://www.research.fi/en/resources/R_D_expenditure/R_D_expenditure_table and Statistics Finland, “R&D Expenditure in the Higher Education Sector Up by 11 Per Cent,” October 27, 2011. 42 See Ministry of Trade and Industry, Sustaining Innovation-Driven Growth, Science and Technology, Government of Singapore, February 2006. 43 Patrick J. Clemens, “Historical Trends in Federal R&D,” in AAAS Report XXXVI: Research and Development FY 2012, Intersociety Working Group, American Association for the Advancement of Science, May 2011. 44 See analysis by American Association for the Advancement of Sciences, “R&D in the FY 2011 year-Long Continuing Resolution,” May 2, 2011. 45 AAAS Report XXXVI, op. cit. 46 Ben Bernanke, “Promoting Research and Development: The Government’s Role.” Issues in S&T, Volume XXVII (4) Summer 2011.

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SUSTAINING LEADERSHIP IN INNOVATION 69 3.5 3.0 2.5 R&D/GDP (Percent) 2.0 1.5 1.0 0.5 0.0 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 Total Federal Nonfederal FIGURE 2.2 Federal funding for R&D as a share of GDP has been in long-term decline. SOURCE: National Center for Science and Engineering Statistics, U.S. R&D Spending Suffered a Rare Decline in 2009 but Outpaced the Overall Economy, NSF 12-310 (March 2012), Figure 4. total U.S. R&D spending to grow by 3.1 percent in constant dollars over the past 20 years.47 The private sector, however, spends nearly three-fourths of its R&D budget on applied R&D activities. [See Figure 2.3] The federal share, with its greater focus on basic R&D, has fallen steadily since the mid 1980s and now is about 0.7 percent of GDP —its lowest level since World War II.48 47 National Science Foundation, Science and Engineering Indicators: 2010, Chapter 4. 48 National Science Foundation Science and Engineering Indicators, 2010.

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70 RISING TO THE CHALLENGE 300 250 200 Billions of Dollars Development 150 Applied Research Basic Research 100 50 0 Federal Government Private Industry Other FIGURE 2.3 U.S. R&D spending by source of funding and character of expenditure, 2009. SOURCE: National Science Foundation, National Center for Science and Engineering Statistics, Science and Engineering Indicators 2012, NSB 12-01 (January 2012), Appendix Tables 4-8, 4-9 and 4-10. While the overall growth in total absolute R&D spending is good news, the downward trend in federal spending as a percent of GDP is less propitious for it is investments in basic research that generate the discoveries that lie behind future innovation. The burden of funding basic research is increasingly falling upon the federal government as U.S. corporations focus more of their R&D dollars on later-stage development. The share of federal R&D that is targeted to basic research has also declined. The Department of Defense—which accounted for more than 52 percent of the federal research budget in 2011—invests around 90 percent of its R&D funds on weapons systems development, rather than on basic or applied research. [See Figure 1.4] This does not mean the federal government can cut back on applied research. It does mean that the United States is spending a great deal less on

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SUSTAINING LEADERSHIP IN INNOVATION 71 early stage research than the official figures might suggest. It also means that much of the U.S. R&D effort is for later-stage military purposes with limited civil applications. The R&D spending of U.S. competitors tends to be the reverse, with heavier emphasis on later-stage R&D for commercial applications. As explained below, a greater emphasis on civilian applied research will be needed in order to compete with other nations that invest more to turn new technology into products and industry, keeping in mind that many of these products eventually have military applications. These trends in R&D spending are not, of course, entirely uniform. Not all nations are meeting their research investment targets. In 2000, for example, the European Union set a target of 3 percent of GDP by 2010 for its members. But collectively the EU remains at 1.9 percent.49 (There are notable exceptions: Germany and France are both significantly increasing their R&D budgets.50) In addition to the recent recession and financial crises, Battelle attributes the shortfall in part to high labor costs, which equal 70 percent of total R&D spending in Europe compared to 45 percent in the U.S. and 30 percent in non-Japan Asia.51 Despite strong growth since 2002, R&D spending in Brazil remains below 1 percent of GDP, although this is counterbalanced by a substantial investment in FINEP, the Brazilian Technology Agency. FINEP has a $2.5 billion budget and focuses on applied research.52 While governments have increased research funding, some are having a difficult time getting the private sector to do the same. Chinese industry accounts for just 21 percent of the nation’s R&D spending, and the vast majority of enterprises do not conduct continuous R&D.53 In Canada, business spending on R&D has remained at only around 1 percent of GDP—compared to 1.6 percent for average OECD countries54--and fell in 2010 for the third year.55 Singapore also has struggled to increase spending on innovation by private 49 Börje Johansson, Charlie Karlsson, Mikaela Backman and Pia Juusola, “The Lisbon Agenda from 2000 to 2010,” CESIS Working Paper No., 106, December 2007. 50 Chancellor Merkel’s government in Germany has proposed increasing R&D expenditures to 3 percent of GDP, up from 2.5 percent. See also remarks regarding European R&D targets by the European Commissioner for Research, Innovation, and Science Máire Geoghegan-Quinn, “Innovation for stronger regions: opportunities in FP7 Committee of the Regions” Brussels, July 14, 2011. 51 Battelle and R&D Magazine, 2011 Global R&D Funding Forecast, December 2010. 52 Xinhua, “Financing agency boosts Brazil's innovation, productivity,” March 6, 2011. 53 See Chunlin Zhang, Douglas Zhihua Zeng, William Peter Mako, and James Seward, Promoting Enterprise-Led Innovation in China, Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2009. 54 Science, Technology, and Innovation Council, State of the Nation 2008. Ottawa: CSTI Secretariat, 2008. 55 The Daily, “Spending on Research and Development,” Statistics Canada, December 24, 2010. Access at: http://www.statcan.gc.ca/daily-quotidien/101224/dq101224a-eng.htm.

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116 RISING TO THE CHALLENGE $27 billion.244 Government support for these clusters includes new incubators and funding for early-state capital programs.245 U.S. Regional Cluster Initiatives As previously mentioned, many promising regional innovation cluster initiatives are underway across the U.S. Many of cluster-building strategies at the state level reflect a holistic understanding of what it takes to build a 21st century innovation ecosystem and compete globally in specific industries. 246 Promising state and regional initiatives often involve public-private partnerships in which corporations, universities, and governments pool resources to establish R&D centers, train workforces, develop supply and support industries, and provide risk capital to starts-ups where angel and venture funding is lacking. 247 State governments are deploying a wider range of policy tools, from tax credits and R&D grants to low-cost loans to free workforce training, in the attempt to close the gap with financial incentives offered by offshore locations in the intense competition for investment.248 Few of these initiatives, however, can match the financial resources and policy support of those in other nations.249 The U.S. Federal Role In remarks at a STEP Board symposium, then Commerce Secretary Gary Locke declared that “regional innovation clusters have a proven track record of getting good ideas more quickly into the marketplace. The burning question becomes, ‘How do we create more of them?’”250 244 Singapore Ministry of Trade and Industry, Sustaining Innovation-Driven Growth, Science, and Technology, Government of Singapore, February 2006, (http://app.mti.gov.sg/data/pages/885/doc/S&T%20Plan%202010%20Report%20(Final%20as%20of %2010%20Mar%2006).pdf). 245 Singapore National Research Foundation, “National Framework for Innovation and Enterprise,” Prime Minister’s Office, Republic of Singapore, 2008, (http://www.nrf.gov.sg/nrf/otherProgrammes.aspx?id=1206. 246 For review of cluster growth in the U.S. states, see Mary Jo Waits, “The Added Value of the Industry Cluster Approach to Economic Analysis, Strategy Development, and Service Delivery.” Economic Development Quarterly, 14(1):35-50, February 2000. 247 A National Research Council Committee led by Gordon Moore concluded that “Public-private partnerships, involving cooperative research and development activities among industry, government laboratories, and universities, can play an instrumental role in accelerating the development of new technologies to the market.” See National Research Council, Government-Industry Partnerships for the Development of New Technologies, C. Wessner, ed., Washington, DC: The National Academies Press, 2003, page 23. 248 See National Research Council, Growing Innovation Clusters for American Prosperity, Charles W. Wessner, Rapporteur, Washington, DC: The National Academies Press, 2011. 249 For a review of scope, as well as advantages and disadvantages of state capitalism, See The Economist, The Rise of State Capitalism, January 21, 2012. 250 Keynote address by then Commerce Secretary Gary Locke at the National Academies Symposium on Clustering for 21st Century Prosperity, Washington, DC, February 25, 2010.

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SUSTAINING LEADERSHIP IN INNOVATION 117 A number of analysts, policy institutes, and non-government organizations have published studies in recent years urging the federal government to make regional initiatives a core element in economic development.251 Rather than calling for massive new funding, several of these same studies call on federal agencies to make more effective and efficient use of scattered resources they already deploy. Michael Porter, for instance, has criticized existing federal programs as “often fragmented, duplicative, and inefficient.”252 One new federal approach is for several agencies to pool efforts with state and local governments and universities to support specific regional clusters aimed at meeting national needs. Under White House leadership, the SBA, NIST, EDA, NSF, and EDC, for example, are joining an effort by the DOE to establish “energy-innovation hubs,” regional innovation clusters in solar power, energy-efficient buildings, nuclear energy, and advanced batteries. The first $129.7 million project seeks to create an innovation hub devoted to developing technologies, designs, and systems for energy-efficient buildings that will be based at the Philadelphia Navy Yard Clean Energy.253 President Barack Obama’s 2009 budget also allocated $50 million in funds administered by the Commerce Department’s Economic Development Agency to assist regional cluster initiatives,254 while the SBA is working with state agencies and the DOD to help launch robotics clusters in Michigan, Virginia, and Hawai’i.255 251 For example, see Karen G. Mills, Elisabeth B. Reynolds, and Andrew Reamer, “Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies,” Metropolitan Policy Program at Brookings, April 2008. Also see Michael E. Porter, “Clusters and Economic Policy: Aligning Public Policy with the New Economics of Competition,” Institute for Strategy and Competitiveness White Paper, revised May 18, 2009. Mark Muro and Bruce Katz, “The New Cluster Moment: How Regional Innovation Clusters Can Foster the Next Economy,” Washington, DC: Brookings Institution, September 2010, http://www.brookings.edu/papers/2010/0921_clusters_muro_katz.aspx. 252 Porter, op. cit. 253 Department of Energy press release, “Penn State to Lead Philadelphia-Based Team that will Pioneer New Energy-Efficient Building designs,” August 24, 2010, (http://www.energy.gov/news/9380.htm). Details on the energy innovation research cluster can be found in the funding opportunity announcement for FY 2010 on the DOE Web site. See http://www.energy.gov/hubs/documents/eric_foa.pdf. 254 President Obama’s fiscal 2009 budget provided $50 million in regional planning and matching grants within the Economic Development Administration to “support the creation of regional innovation clusters that leverage regions’ existing competitive strengths to boost job creation and economic growth.” See Executive Office of the President, “A Strategy for American Innovation: Driving Towards Sustainable Growth and Quality Jobs,” National Economic Council Office of Science and Technology Policy, September 2009. 255 Presentation by Karen Mills, “Building Regional Innovation Clusters” at the National Academies Symposium on Clustering for 21st Century Prosperity, February 25, 2010.

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118 RISING TO THE CHALLENGE HUNTING FOR GLOBAL TALENT One of the keys to America’s post-war dominance of high-technology industries has been its ability to attract the world’s best and brightest scientific, technological, and entrepreneurial talent. European immigrants such as Alexander Graham Bell helped fuel America’s industrial takeoff, and the U.S. assumed world leadership in physical sciences with the help of an influx of physicists who fled European fascism, including such Albert Einstein and Enrico Fermi.256 Since the 1970s, immigrant engineers and scientists from India, Taiwan, South Korea, and then China have been instrumental to the success of the U.S. semiconductor, computer, software industries, and biotechnology industries and have founded an inordinate share of U.S. technology companies.257 America is as dependent as ever on imported brainpower as a pipeline for future innovation: Foreign students earned 40 percent of U.S. science and engineering doctorate degrees in 2005, compared to 16 percent in 1980. In engineering, the share was 61 percent.258 One telling sign of this foreign dominance is to look at where recipients of U.S. engineering Ph.D. have earned their bachelor’s degrees. Of the 10 schools with the highest representation of alumni in 2008, six are from China. 259The Massachusetts Institute of 256 These scientists and engineers were highly esteemed by society though public perceptions may have changed. Recent research suggests that public perceptions of science are highly contextual, with people making judgments about the relative trust to be placed in traditional scientific expertise (which often is generated by government institutions) and in local knowledge based in the local context. See, Lewenstein, Bruce V. 1992. “The Meaning of 'Public Understanding of Science' in the United States After World War II.” Public Understanding of Science 1 (1):45-68. Recent research also reveals that that social support contributes directly to men’s and women’s ability to envision themselves in a future science career, which, in turn, predicted their interest in and motivation for a science career. See Sarah K. Buday, Jayne E. Stake and Zoë D. Peterson, “Gender and the Choice of a Science Career: The Impact of Social Support and Possible Selves.” Sex Roles-Journal of Research, 66(3-4):197-209, 2012. 257 AnnaLee Saxenian of the University of California at Berkeley estimated that Chinese and Indian engineers were represented on the founding teams of 24 percent of Silicon Valley technology businesses founded between 1980 and 1998. See AnnaLee Saxenian, Silicon Valley’s New Immigrant Entrepreneurs, San Francisco: Public Policy Institute of California, 1999. A follow-up study found that in one-quarter of all U.S. technology companies founded between 1995 and 2005, one-quarter had chief executive officers or chief technology officers who were foreign-born. See Vivek Wadhwa, Ben Rissing, AnnaLee Saxenian, Gary Gereffi, “Education, Entrepreneurship and Immigration: America’s New Immigrant Entrepreneurs, Part II,” Duke University Pratt School of Engineering, U.S. Berkeley School of Information, Ewing Marion Kauffman Foundation, June 11, 2007. 258 Robert V. Hamilton presentation at Brookings Institution conference on “Immigration Policy: Highly Skilled Workers and U.S. Competitiveness and Innovation,“ Washington, February 7, 2011. 259 Semiconductor Industry Association, Maintaining America’s Competitive Edge: Government Policies Affecting Semiconductor R&D and Manufacturing Activity, prepared by Dewey & LeBoeuf, March 2009, (http://www.sia-online.org/galleries/default- file/Competitiveness_White_Paper.pdf).

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SUSTAINING LEADERSHIP IN INNOVATION 119 Technology ranks No. 10. Chinese students alone accounted for 30 percent of all U.S. doctorate degrees granted in natural sciences.260 Now the competition for non-native talent is becoming global as more countries take an activist approach to recruiting talent.261 To address skill shortages exacerbated by an aging population, the European Union has promulgated a “blue card” that allows highly skilled migrants from non-EU nations to live and work on a temporary base, and also allows them to move freely among most member countries.262 The EU also is simplifying procedures for obtaining legal resident status for foreign workers to by setting up a “one- stop-shop” system for applicants.263 Canada has made recruiting foreign talent a top priority in its national innovation strategy. 264 Forty percent of the 8,053 new faculty members and 44 percent of the 1,806 new researches recruited by Canadian universities and the Foundation for Innovation as of the fall of 2009 came from other nations, for example.265 Thirty percent of the nearly 2,000 department chairs hired the Canada Research Chairs program also were recruited outside of Canada.266 Singapore’s innovation strategy puts a heavy emphasis on “drawing creative and talent people from all corners of the world to live and work in Singapore.”267 Among its prize recruits are eminent scientists from the National Cancer Institute, MIT, and the University of California at San Diego.268 While other nations step up recruiting, it has been getting more difficult for highly skilled foreigners to live and work in the U.S. The backlog for permanent resident visas grew so long amid tightened scrutiny after the Sept. 11, 260 Robert V. Hamilton, “Foreign Natural Sciences Doctoral Attainment at U.S. Universities, 1980 to 2005, George Mason University, prepared for Brookings Institution conference on “Immigration Policy: Highly Skilled Workers and U.S. Competitiveness and Innovation, “ Washington, February 7, 2011. 261 See Devesh Kapur and John McHale, Give us Your Best and Brightest, Washington, DC: Center for Global Development, 2005. 262 The Blue European Labour Card is an approved EU-wide work permit (Council Directive 2009/50/EC) allowing high-skilled non-EU citizens to work and live in any country within the European Union, with the exception of UK, Denmark, and Ireland. 263 Europa, “Making Europe More Attractive to Highly Skilled Immigrants and Increasing the Protection of Lawfully Residing and Working Migrants,” Brussels, October 23, 2007, (http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/1575. 264 Industry Canada, Achieving Excellence: Investing in People, Knowledge and Opportunity— Canada’s Innovation Strategy, 2001. (http://dsp-psd.pwgsc.gc.ca/Collection/C2-596-2001E.pdf). 265 Canada Foundation for Innovation, 2009 Report on Result, op. cit. 266 Canada Research Chairs data http://www.chairs-chaires.gc.ca/home-accueil-eng.aspx. 267 Ministry of Trade and Industry, Sustaining Innovation-Driven Growth, Science, and Technology, Government of Singapore, February 2006, (http://app.mti.gov.sg/data/pages/885/doc/S&T%20Plan%202010%20Report%20(Final%20as%20of %2010%20Mar%2006).pdf). 268 Lim Chuan Poh, “Singapore Betting on Biomedical Science,” Issues in Science and Technology, Spring 2010.

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120 RISING TO THE CHALLENGE 2001, terrorist attacks that an estimated 1 million people were waiting for 120,120 visas issued a year as of 2006—a backlog of nine years.269 The tougher immigration climate comes despite forecasts of looming skill shortages due to demographic changes and declining interest by U.S. students in science and engineering. The McKinsey Global Institute, for instance, projects a possible shortfall of nearly 2 million technical and analytical workers in the U.S. over the next 10 years. 270 The National Association of Manufacturers and Deloitte & Touche reported that higher immigration will be necessary to meet a projected need for new skilled workers in manufacturing by 2020. The alternative could be “a significant decrease in manufacturing’s competitiveness.”271 The Brookings Institution concludes that the “the U.S. immigration priorities and outmoded visa system discourage skilled immigrants and hobble the technology-intensive employers who would hire them.” As a result, these policies “work against urgent national priorities.”272 Not all analysts agree that dramatic increases in immigration are required to meet future skill needs. Research by Lindsey Lowell and Harold Salzman, for example, concluded that the U.S. actually graduates more STEM students than are hired each year, and that many graduates find work in other fields for economic reasons.273 Nor is there yet firm evidence that Chinese, Indian, and other foreign nations are returning home in significant numbers after receiving advanced U.S. science and technology degrees. 274 Other studies, however, suggest a significant risk of a “brain drain” as highly skilled Chinese and Indians leave to take advantage of greater career opportunities in their home countries.275 Continued inaction and complacency threatens over time to undermine an essential pillar of U.S. competitiveness. Several proposals seek to reform U.S. immigration rules that tilt heavily toward granting citizenship to relatives of current citizens, regardless of 269 See Vivek Wadwha, Guillermina Jasso, et. al, “Intellectual Property, the Immigration Backlog, and a Reverse Brain-Drain,” Ewing Marion Kauffman Foundation, August 2007, (http://www.kauffman.org/uploadedFiles/reverse_brain_drain_101807.pdf). 270 James Manyika, et. al, Growth Renewal in the United States: Retooling America’s Economic Engine, McKinsey Global Institute, February 2001. 271 The National Association of Manufacturers, the Manufacturing Institute, and Deloitte & Touche, “Keeping America Competitive: How a Talent Shortage Threatens U.S. Manufacturing,” April 21, 2003. 272 Darrell M. West, “Creating a ‘Brain Gain’ for U.S. Employers: The Role of Immigration,” Brookings Policy Brief Series #178, Brookings Institution, January 2011. 273 B. Lindsay Lowell, Hal Salzman, Hamutal Bernstein, and Everett Henderson, “Steady as She Goes? Three Generations of Students Through the Science and Engineering Pipeline,” paper presented at annual meets of the Association for Public Policy Analysis and management, Washington, DC, October 2009. 274 See Patrick Gaule, “Return Migration: Evidence From Academic Statistics,” National Bureau of Economic Research fellow, draft paper, November 17, 2010. 275 Vivek Wadhwa, AnnaLee Saxenian, Richard Freeman, and Alex Salkever, “Losing the World’s Best and Brightest: America’s New Immigrant Entrepreneurs,” Ewing Marion Kauffman Foundation, March 2009.

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SUSTAINING LEADERSHIP IN INNOVATION 121 skills. Only 6.5 percent of U.S. immigrant visas are for skilled workers, compared to 36 percent in Canada. And of those holding H-1B visas, only 7 percent are able to change to permanent resident status, notes Darrell West of Brookings.276 Common reform proposals include easing limits on temporary work visas, streamlining visa procedures, and giving priority for green cards to foreigners with advanced science and technology degrees and needed skills.277 The McKinsey Global Institute observes that nations such as Australia, the United Kingdom, and Canada have moved to a point-based system for allocating residency based heavily on skill levels. It suggests the U.S. do the same.278 Proposed changes in U.S. immigration policy, however, have aroused intense political passions that make it difficult for Congress to consider reform of rules that would attract and retain highly skilled immigrants to the Unites States.279 In this context, the recent initiatives by the Department of Homeland Security and the Bureau of Citizenship and Immigration Services are welcome. Announced in August 2011, these initiatives now make it possible for foreign entrepreneurs to obtain an EB-2 immigrant visa if they can demonstrate that their business endeavors will be in the national interest of the United States. Also, H-1B beneficiaries who are sole owners of the petitioning company may petition for H-1B non-immigrant visas to employ foreign workers in specialty occupations that require theoretical or technical knowledge.280 THE WAY FORWARD The world of innovation is changing rapidly. Old assumptions about how investments in research result in commercial products and domestic industries are becoming less valuable as frameworks for U.S. science and technology policy. A New Approach: A new policy approach is required, one based on a richer understanding of the complexity and global dimensions of innovation. While greater investments in research and development are needed to keep the United States at the technology forefront, that alone will not guarantee globally competitive U.S. industries and a prosperous U.S. economy. Intermediating 276 Darrell M. West, “Creating a ‘Brain Gain’ for U.S. Employers: The Role of Immigration,” Brookings Policy Brief Series #178, Brookings Institution, January 2011. 277 Ibid. Some analysts have emphasized the need to strengthen the U.S. pipeline of scientists and engineers and to create a more competitive immigration policy that admit the “best and brightest” from around the world. See the statement of B. Lindsay Lowell before the House Judiciary Committee “Immigration and the Science & Engineering Workforce: Failing Pipelines, Restrictive Visas, and the ‘Best and Brightest’”October 5, 2011. 278 James Manyika, et. al., Growth and Renewal in the United States: Retooling America’s Economic Engine, McKinsey Global Institute, February 2011 279 For a review of potential reforms concerning the H-1B visa, which enables U.S. employers to hire temporary, foreign workers in specialty occupations, see GAO, “Reforms Are Needed to Minimize the Risks and Costs of Current Program.” GAO-11-26. 280 Wall Street Journal, “U.S. to Assist Immigrant Job Creators.” August 3, 2011.

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122 RISING TO THE CHALLENGE institutions and new initiatives, both at the state and federal levels, as well as by private foundations, are needed for the United States to capture the benefits of its public investments in research and development. Indeed, the way forward for the United States is to build on its strengths: open competition, deep private capital markets, leadership in academic research, a flexible labor force, intellectual property protections, and an environment that allows entrepreneurs to quickly respond to new market and investment opportunities. Importantly, these strengths need to be renewed and reinforced, as they have in the past, with federal programs to nurture and grow new technologies and new industries of the future. The Role of Partnerships: Public-private partnerships have long been a key element of successful U.S. innovation policy.281 Public-private partnerships can provide incentives for closer collaboration among government industry, higher education, the military, private investment groups, and other institutions to foster an environment in which the United States can thrive in an era of open and global innovation.282 Well designed public-private partnerships not only can help insure that the U.S. remains a world leader in creating knowledge, but they also can enable America to capture more of the economic value of innovation by making U.S. regions more competitive places to translate inventions into products, companies, industries, and jobs. This report documents several examples of successful U.S. collaboration between government, industry, and academia. They include federal programs such as the SBIR and the NIST Advanced Technology Program, research consortia such as Sematech, and newer institutions such as the Flexible Display Center at Arizona State University.283 This report also highlights a number of promising and innovative state and regional public- private initiatives to bolster competitiveness.284 Such initiatives include regional innovation clusters, new kinds of science parks, workforce-training programs, and efforts to help entrepreneurs obtain access to the facilities, technical assistance, and early-stage capital they need to convert U.S. innovation into a new wave of U.S. industries. Federal agencies can play a valuable support role in aiding these regional initiatives. What are others doing? American policymakers also need to learn from the experiences of other nations and discern which best practices can be 281 National Research Council, Government-Industry Partnerships for the Development of New Technologies, Summary Report, C. Wessner, ed., Washington, DC: National Academy Press, 2001. 282 National Research Council, Government-Industry Partnerships for the Development of New Technologies: Summary Report, C. Wessner, ed., Washington, DC: National Academy Press, 2001. 283 See Chapter 6 for an illustrative review of national policies and programs to support emerging industries abroad. 284 See Chapter 7 for an illustrative review of national and regional policies to develop innovation clusters around the world.

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SUSTAINING LEADERSHIP IN INNOVATION 123 adapted to the American context.285 Well-designed public-private partnerships can address many of the challenges facing the myriad actors of the U.S. innovation ecosystem and can help ensure that more of the fruits of America’s tremendous investments in research flow into the American economy. The bold and innovative strategies being deployed abroad offer valuable lessons for policymakers in the U.S. This report details a great variety of actions governments are taking around the world to both increase their nations’ innovation capacity and global competitiveness in emerging technology-intensive industries. In some cases, governments are adapting the most successful features of the U.S. innovation ecosystem—such as university- industry collaboration, public provision and support for early-stage risk capital, strong protection of intellectual property rights, and well-funded, scalable research parks. In other cases, nations in Asia and Europe are pioneering new models of public-private partnerships that far exceed the scale and scope of comparable U.S. programs. This is especially true when it comes to applied technology and support for large-scale manufacturing. This unprecedented focus around the world on innovation means that American science and technology policies can no longer be based on the outdated assumption that the United States is naturally destined to remain the global center of innovation activity. Nor can it be based on the assumption that bolstering American industrial competitiveness is merely a matter of increasing R&D spending. As innovation becomes more globalized, absorbing and capitalizing on product and process innovations from abroad will become increasingly important for U.S. competitiveness. Importance of Collaboration: policies also need to take into account the increasingly global and open nature of the innovation process, much of which takes place within collaborative international networks of researchers in universities, companies, and other institutions. As nations around the world increase their innovation capacity and R&D workforces, leveraging technology and brainpower abroad will become increasingly important for the U.S. to achieve its own science and technology goals. Collaboration in research and development can greatly accelerate discoveries of cures for chronic disease, the development of renewable energies, and technologies to curb the negative impacts of climate change. Open cross- border innovation networks, meanwhile, can help corporations turn new technologies into innovative products faster, at greater variety and at lower cost. It is important, therefore, to insure that the United States can compete, cooperate, and prosper in this new world of innovation. That will require a fresh approach to innovation policy. 285 See Chapter 5 for case study reviews of programs and policies of leading nations and regions, including China, India, and Germany.

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124 RISING TO THE CHALLENGE Box 2.4 A History of Public Private Partnerships Public-public-private collaborations have been woven into the fabric of the U.S. economic system from the beginning of the Republic. What became known as the American System of Manufacturing, in which goods from muskets to clocks were made of interchangeable parts, was pioneered in the early 1800s through War Department contracts.286 Congress funded Samuel Morse’s demonstration of the first telegraph with a substantial grant in 1842. America’s aircraft industry was nurtured by the 1925 U.S. Air Mail Act.287 RCA was founded in 1919 at the initiative of the Navy Department, which also held equity and a board seat, so that the U.S. could have a radio communication industry to compete with Britain’s Marconi Co.288 The U.S. Signal Corps funded most of the initial research for transistors and semiconductors, and the military funded the first production lines of Western Electric, General Electric, Raytheon, and Sylvania. It also bought most of the output for weapons and communications systems.289 Admiral Hyman Rickover and his naval reactor group oversaw the design and construction of America’s first civilian light-water nuclear power plant at Shippingport, Penn., in the 1950s. 290 Military research and weapons contracts also have been instrumental in establishing America’s aerospace and computer industries and the forerunner of the Internet.291 Federal programs have been instrumental as well to the U.S. pharmaceutical industry. A recent study found that public-sector research institutions made important contributions to 286 See David A. Hounshell, From the American System to Mass Production, 1800-1932: The Development of Manufacturing Technology in the United States, Baltimore, Maryland, USA: Johns Hopkins University Press, 1984. 287 A stated purpose of the U.S. Air Mail Act of 1925 (also known as the Kelly Act), which authorized the U.S. Postal Service to contract with private aviation companies, was “to encourage commercial aviation.” The federal role in their early airline industry is explained in Roger E. Bilstein, Flight in America: From the Wrights to the Astronauts, Baltimore: Johns Hopkins University Press, 1984, and in Tim Brady, editor, The American Aviation Experience: A History, Southern Illinois University Press, 2001. 288 An early account of the U.S. Navy’s role in establishing RCA and the U.S. radio communication system is found in The World’s Work, “The March of Events,” Volume XLIV, May 1922. 289 A concise history of U.S. government involvement in establishment of America’s electronics industry is found in Kenneth Flamm, Mismanaged Trade?: Strategic Policy and the Semiconductor Industry, Washington, DC, Brookings Institution, 1996. pp. 27-38. 290 Richard Hewlett and Francis Duncan, The Nuclear Navy, Chicago: University of Chicago, 1974. 291 See National Research Council, Funding a Revolution, Government Support for Computing Research, Washington, DC: National Academy Press, 1999. The extensive NRC review documents the seminal role o federal funding for the information and communications industries of today. See also the presentation by Kenneth Flamm of the University of Texas at Austin in National Research Council, Innovation Policies for the 21st Century, op. cit.

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SUSTAINING LEADERSHIP IN INNOVATION 125 the discovery of up to 21.2 percent al all new FDA-approved drugs from 1990 through 2007.292 Capturing the value of U.S. investments in R&D: The assumption that the output of the U.S. innovation process will be captured by U.S.-based industry has been rendered obsolete by globalization and the rise of corporate open innovation practices. In today’s world, knowledge created through federally funded research at universities and national laboratories can be commercialized and industrialized virtually anywhere. The key is to take measures to provide the funding, support services, and to anchor new and existing companies in clusters of competency here in the United States. This report highlights the features of a more comprehensive innovation policy. It calls for a better understanding by government of the real factors behind corporate decisions on where to develop new technologies, commercialize products, and locate production and help close competitive gaps with other nations to the degree possible. Some of these gaps can be closed with more enlightened tax policy, in others through incentives such as research grants, loans, and credits for U.S.-based manufacturing. The committee’s formal findings and recommendations on how to sustain a strong American innovation system for the 21st century are found in the next two chapters. 292 Ashley J. Stevens, Jonathan J. Jensen, Katrine Wyller, Patrick C. Kilgore, Sabarni Chatterjee, and Mark L. Rohrbaugh, “The Role of Public-Sector Research in the Discovery of Drugs and Vaccines,” The New England Journal of Medicine, February 9, 2011, (http://healthpolicyandreform.nejm.org/?p=13730&query=home).

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