Innovate or perish

THE UNITED STATES is losing its competitive advantage and may soon lose its innovative edge. It does not invest fully in resources most critical for sustained high-tech leadership, and the most talented and productive regions of the Third World challenge our dominance with skills and efforts only we once possessed.

The origins of the decline can be traced to the 1960s, when the U.S. trade surplus in high-tech manufactured goods began slipping. By 1972, the surplus had disappeared.

In the 1980s, U.S. manufacturers rapidly lost market share in high-tech goods to companies based in Asia. “Japan Inc.” was the presumed threat, and the Reagan administration’s buzzword was “competitiveness.” I served on one of President Reagan’s special commissions on competitiveness, but like most such commissions, it was chiefly intended to stave off congressional pressure to remake the U.S. economy in Japan’s image. Competitiveness was so overused in political discourse that the news media called it the “C-word.” Meanwhile, Japanese electronics manufacturers drove their U.S. counterparts out of business.

In the 1990s, the Japanese real estate bubble burst, and U.S. business leaders stopped reading books about Japanese “quality circles” and Theory Z and started implementing Japan’s “lean” production technologies. The erosion of U.S. market share in high-tech goods slowed and in some cases reversed. The Japanese industrial image shrank to its normal size, and U.S. productivity grew once again.

The 21st century has brought globalization and the emergence of such new high-tech competitors as China and India. Outsourcing technically skilled jobs has become the chief indicator of a newly perceived U.S. comparative weakness. For instance, the salary of one engineer or chemist in the U.S. is equivalent to five in China and 11 in India. This time the buzzword is “innovation.”

A country’s capacity for innovation is hard to measure. Academics define the term as the successful commercial introduction of a novel product, service or business model. Innovations spawned by new science may generate whole new industries.

The U.S. talent for innovation is still the envy of the world. With but one-quarter of the world’s scientists and engineers, we perform one-third of the world’s research. Our primary high-tech competitors struggle to imitate, let alone duplicate, our private venture-capital industry. Top engineering graduates of Stanford University would rather start a company than work for a well-established high-tech corporation. I know of no university outside the U.S. whose engineering students are such eager entrepreneurs.

But the economic facts paint a grim picture. The U.S. annually imports $24 billion more in high-tech products than we export. Our share of global production has fallen from 30% to 17% in the last two decades. The U.S. is closing chemical plants (70 in 2004, 40 last year) and constructing only one new billion-dollar plant. By contrast, there are 50 chemical plants under construction in China. U.S.-owned firms’ share of all new patents awarded is now less than one-third.

This may only worsen because the number of U.S. students pursuing technical careers is declining. About 59% of undergraduates in China study engineering. In Japan, the number is 66%. In the U.S., only 32%. Nor is the pre-college engineer pipeline promising. In head-to-head matchups with other countries, U.S. high school seniors consistently score lower in general mathematical and scientific knowledge.

To offset our generally poor K-12 education, universities and colleges have recruited the best and brightest foreign students to fill their graduate-school programs. But this source is drying up because the quality of foreign schools is improving, work opportunities abroad are multiplying, the United States’ image as the best place to “lead a good life” is declining and the U.S. government has not kept pace with foreign governments’ emphasis on nurturing innovation.

Some U.S. responses to 9/11 have further blunted our innovative edge. More restrictive visa policies and other regulations have discouraged many foreign students from studying here. Proposed regulations would force U.S. universities to police their laboratories to prevent certain foreign students from using some equipment. A new, vaguely defined category of scientific information called “sensitive but unclassified” allows government agencies to halt publication of new research in the name of national security.

But 9/11 is not solely to blame for the failure of federal government policies to address the economic requirements for a vigorous technical base for commercial innovation. A few examples:

* Since 1990, federal support of research in mathematics, engineering and the physical sciences has been stagnant. Federal funding (in constant dollars) of research in non-defense-related areas, except medicine, is lower today than it was 25 years ago. U.S. research and development spending by both private industry and government has been falling as a percentage of gross domestic product since 2000.

* The U.S. venture-capital industry is shying away from more exciting but risky innovations. Only about 1% of venture firms’ money now seeds such promising high-tech innovations as high-capacity data storage using holography and nanotech devices for use in new surgical methods.

* Chiefly for ideological reasons, the Bush administration has not promoted an expansion of stem-cell research, has declined to pursue the implications of global climate change and has failed to mount a balanced research effort to reduce U.S. energy dependency.

But state and local governments and the private sector are also needed in the national response to our innovation challenge. The seedbeds for science-based innovation are concentrated in a few urban areas marked by networks of resources and relationships, angel investors, local and state government programs to stimulate creation of new companies, and a large supply of technically savvy entrepreneurs. Although federal policy did little to create these nuclei of a competitive industrial economy, it provided incentives to help them grow. Regrettably, it increasingly erects more barriers than it offers incentives.

Adoption of the recommendations contained in a new National Academy of Sciences report titled “Rising Above the Gathering Storm” may help reverse the erosion of the intellectual soil from which U.S. innovation grows. But unless the Bush administration and Congress rein in the rising budget deficit to free up more money for education and science, the U.S. will continue to drift down the path to economic mediocrity.