Reports

U.S. Competitiveness: The Innovation Challenge
U.S. House of Representatives
Committee on Science
Thursday, July 21, 2005

Overview:

Recognizing that as much as half of U.S. economic growth since the end of World War II has come about as a result of technological discovery and high-growth entrepreneurship, the full House of Representatives Committee on Science invited industry and academic leaders to assess the state of American innovation in a July 21 hearing.

In prepared testimony, the witnesses told policy makers that they had to choose between policies that either back an economy based on innovation or one based on “commoditization.” The latter— a process through which economies attempt to differentiate themselves and build competitive advantages in classical metrics like pricing, economies of scale and efficient distribution of intellectual capital — would likely diminish in efficacy, as America continues to act as a single player in a global market place, competing against emerging Asian nations that can better leverage the traditional factors of production, they warned. Instead, IBM Executive Vice President for Innovation and Technology Nicholas M. Donofrio urged lawmakers to back institutional frameworks that create incentives for Americans to invest, manage and leverage the creation of capital as a 21st Century model of economic growth.

Donofrio’s recommendations were echoed by the other witnesses, including The Johns Hopkins University President William R. Brody, who pointed out that new innovative activity would create “capacity to increase the real income of all Americans by producing high-value products and services that meet the test of the world markets.”

However, Brody warned, “it looks as though the innovation pipeline is slowly being squeezed dry,” lamenting decreases in the federal role of funding high-tech research and development (R&D), quality of education and faults in other government policies that encourage new innovation.

Though innovation is driven by the private sector, Donofrio pointed to an underlying “innovation ecosystem,” through which government policies exert enormous influence over the pace of knowledge advances, incentives for private investment in innovation and conditions under which creative entrepreneurial activities could flourish. Refusing repeated requests to identify a single policy lever to encourage a continued inventive spirit, the witnesses instead pointed to a collection of broad policy spheres they said worked synergistically to promote innovation.

New Challenges in Education:

Witnesses reached broad consensus in identifying quality education as the foundation for all innovation and economic growth; they also agreed that America’s current education system has failed in providing such a foundation.

“The first area, and in my mind, the most important to ensure global competitiveness and continued innovation, is a sound education system,” Cisco Systems Chairman John P. Morgridge said in prepared testimony.

Demand for students knowledgeable in math and science continues to outpace domestic supply by a factor of two, the witnesses reported, warning that careers that require high-level math and science skills would continue to grow much faster than all other fields in the future. America, for example, graduates as many engineers as South Korea, a much smaller nation, and only one-fourth the number of Chinese engineers.

In the short term, panelists urged Congress to revisit immigration policies to increase the ability of universities and private companies to bring in skilled workers and students from foreign nations. Foreign graduates studying science and technology in American universities outnumber American students in those same programs, Brody said, warning that security concerns that threaten to keep them out represented a serious threat to national competitiveness.

Over a longer time period, the witnesses urged a serious overhaul of the education system, including efforts to encourage increased participation on the part of minorities and women, who continue to be drastically under-represented in ranks of high-tech and science majors.

While they said corporations needed to actively support the development of a skilled labor pool, the panelists urged lawmakers to raise the quality of teachers in the classroom and reform education curriculum, encouraging creative and integrative instruction that employs problem-based learning (PBL).

Some congressmen suggested that the recommendations for increased numbers of skilled workers were disingenuous, pointing to recent efforts by industry leaders to outsource their operations to lower-paying nations. However, Morgridge told the members that workers endowed with new thought processes were exactly what was needed to make American workers more competitive in a global marketplace, suggesting that “creativity” was not a mobile asset that could be leveraged from foreign workers through even the most modern communication channels.

Long-Term Focus on R&D:

Brody spoke critically about falling government investment in R&D efforts as a proportion of overall GDP over the past three decades, suggesting that the meager funds still remaining in such programs were too focused on short-term and incremental technological advances. Instead of simply redirecting funds from research efforts in other spheres, he said the government needed to drastically increase its investment in “far out” frontier research that would have the potential for incubating new industries and transforming entire ways of life.

Similarly, recognizing that private industry has taken the lead in funding R&D, Brody said government policies needed to “find ways to encourage private industry to be more accepting of risks” while “removing all incentives to engage in short-term, bottom-line thinking that has, unfortunately, become a hallmark of too many American corporations.” Pointing to growing investor impatience and the growing ephemeral nature of equity investments, he recommended the adoption of new tax policies that reward companies that take significant risks and make large investments in research while creating disincentives for short-term “bottom-line-only thinking.”

Support for Physical Infrastructure of Innovation:

Sharing growing concerns that the U.S. has fallen from fourth to 16th globally for broadband penetration, and was positioned to continue the descent, Morgridge praised policies supporting universal broadband connectivity. In particular, he advocated “date certain” mandatory transition from analog to digital broadcasting, which promises to open up a rich broadcast band that could provide a new alternative to the infrastructure currently supported by phone and cable lines.

Though current efforts will likely miss the 2006 goal currently enshrined in federal law, he said policies that established a firm deadline would provide certainty that would encourage private investment in developing and leveraging the new opportunities created in the transition.

Reform in Legal Framework:

The U.S. Patent and Trademark Office is currently overburdened and follows procedures that issue “poor quality patents,” creating an excessively litigious environment that is detrimental to entrepreneurial activity, Morgridge warned. In establishing policies that provide incentives for innovation while also promoting public access to new information, the witnesses urged a middle ground that delicately balanced the two priorities without allowing one to stifle the other.

Similarly, they discouraged lawmakers from adopting policies that enshrine industry standards into law or favor specific technologies over others. Because improved practices usually emerge in a fast-paced 18-month cycle, the marketplace is the best arbiter in determining the winner of the competition, they concluded.

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