Strategy for Innovation for the Next Thirty Years

mEMOS TO THE FUTURE

W

BUsiness Horizon Quarterly

hen editors of Life magazine ranked Thomas Edison first on the list of “the most important people of the last 1000 years,” they were recognizing the importance of innovation to improving the material condition of mankind.

Make no mistake, innovation is what drives productivity. It is what makes us wealthier and healthier (if not wiser). It is impossible to conceive of modern America today without appreciating the waves of innovation that made the United States the most powerful and dynamic large nation in history.

Innovation matters so much it’s worth pausing to ask how we get it and to wonder how we might get more of it. In this essay, I’ll propose a strategy to ensure robust American innovation over the next thirty years.

FOR THE NEXT THIRTY YEARS

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!""#$%&!#" 1) Getting Our Priorities Right There are many reasons the nation must confront its

2) Tackling the Abundance of Regulation While no one denies that an economy as advanced and

large and accumulating debt. Yet, one reason that doesn’t

complicated as America’s will need some regulation, the

get enough attention is that it’s harmful to American

question is, what is the proper scope and reasonable cost

innovation. Here’s why:

of regulation? On this score, there’s bipartisan agreement

Innovation is powered by many factors, one of which is the total stock of knowledge in society. The federal government helps build the stock of knowledge through its support of basic research and development.

The problem today—and for the last several years—is much federal research and development comes out of the government’s discretionary spending. The growth in entitlement spending is crowding out its discretionary

that America’s current system of regulation is a mess and ripe for an overhaul.

Serious regulatory reform will be a boon for innovation. After all, regulation is designed to homogenize activities, among firms and individuals. It’s designed to get businesses or individuals acting in precisely the same manner to achieve a desired outcome.

Yet think about the essential character of innovation

spending, meaning there’s less room for investments in

for a moment. Innovation, by its very nature is

research and development (R&D).

heterogenous. It means doing something different than

Some of the areas ripe for additional R&D spending that would boost innovation down the road include the National Institutes of Health, the National Science Foundation, NASA, and the National Institute of Standards and Technology.

As a report from the research group Third Way notes, “as the cost of entitlement programs like Medicare and Social Security has skyrocketed, we’ve spent less and

before; something different than from how everyone else does something. It is designed to break with the past, to disrupt established patterns of production and activity.

In that way, faulty regulation can be an innovation killer by leaving too little room for new ways of doing business, for new business models to emerge, for new techniques to take root in the marketplace.

Good regulation protects consumers, workers, and the

less of our budget educating kids, building roads, and

environment while still making it possible for companies

curing disease.”

and consumers to experiment, to engage in trial and error,

As a nation we have prioritized entitlement spending over spending on research and development. No one is arguing that the nation shouldn’t have an adequate safety net. But if it comes at the expense of productivity enhancing innovation, then everyone is made worse off.

Entitlement reform will be good for its own sake; but it will also mean the nation can spend adequately on improving

and to pursue new enterprises and initiatives.

3) Fix Immigration In some ways, innovation is simply an odds game.

Good innovations arise when ideas are combined with human effort in ways that satisfy the needs of companies and customers.

the nation’s knowledge base, thus bolstering innovation.

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mEMOS TO THE FUTURE

BUsiness Horizon Quarterly

To get more innovation then, it helps to have more

Former Microsoft technologist Nathan Mhyrvold

brains and more diverse perspectives focusing on an

has said “We live in a society where technology is a very

economy’s problems and opportunities.

important force in business in our daily lives. And all

Of course, we have a lot of that already in the United States. But we can always use more. As Dr. Linus Pauling said, “The best way to have a good idea is to have a lot of ideas.”

technology starts as a spark in someone’s brain. [emphasis added] An idea of something that didn’t exist before, that once they have invented it—brought it into existence— could change everything.” That’s why we need to bring— and keep—more brains here in the United States.

“Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new capacity to create wealth.”

- Peter Drucker

4) Get Incentives Right The writer Edward Conard has noted that “people create innovation by finding ways to make improvements and by implementing those improvements—both incremental improvements and major changes.” It’s important that entrepreneurs have the access to capital they need to experiment and grow, and that the broader ecosystem of investment and risk-taking is one that is conducive to

This is one reason we need to fix America’s approach to immigration. Right now the United States brings to its

capital formation.

Implementation of innovation is one area where

shores some of the most talented and enterprising people

incentives come in to play, particularly with respect to tax

from across the globe. Many of them come to study in

policy. As it stands now, the United States has the highest

our top-flight research colleges and universities.

corporate tax rate in the developed world. Other developed

At the same time, we make it more difficult than we should for those people to remain in the United States, to start companies, to get married, and to feel as if America is their home. As a result, many of them are returning to their native countries in pursuit of new opportunities, or simply to avoid putting up with visa and other hassles.

The loss of these people—of all that human capital— means a loss of potential new innovation. That’s why it will help to reform our nation’s immigration laws to make it easier for skilled immigrants to come to America and build meaningful, satisfying lives here.

nations have, over the last fifteen years, been lowering their corporate tax rates. They understand that, at the margin, a high corporate tax rate is a disincentive to capital formation and to resultant innovation and productivity enhancements.

The United States has also experienced an alarming decline in initial public offering in recent years. There are many reasons for this, but one of them is surely the disincentives to launching an initial public offering (IPO) created by laws such as Sarbanes-Oxley.

The decline in IPO activity gives those of us concerned with innovation great pause. Many innovations are pushed into the commercial marketplace by new firms that were created precisely to drive disruptive innovation.

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Companies like Google and MasterCard are some of

AN INNOVATIVE FUTURE

the innovative companies to have tapped public equity markets over the last decade. No one should be satisfied

The great student of industrial capitalism Peter

with an anemic environment for IPOs. Getting the

Drucker once noted that “Innovation is the specific

incentive mix right—to remove barriers that discourage

instrument of entrepreneurship. The act that endows

growing firms from making a public debut—must be part

resources with a new capacity to create wealth.” This is

of any comprehensive innovation strategy.

why innovation is so important to the United States. As the wealthiest and most advanced of all the industrial

5) Adequately Fund the Patent Office

democracies, the United States cannot create new wealth by copying the habits and practices of other nations. It

The U.S. Constitution tells us that patents are

must drive new innovation if it is to create new wealth.

designed “to promote the progress of science and useful arts.” In other words, they are designed to help drive innovation.

This is why the climate for innovation matters so much in the United States. Any person in the policy community would be prudent to view his or her

Unfortunately, such promotion is badly slowed if the office designed to process applications, in our case

proposals through a lens that asks, “will this advance or retard the innovative capacity of the United States?”

the U.S. Patent and Trademark Office (US PTO), is insufficiently equipped and staffed to do the job.

Too often the temptation is to forget about the effect or new laws on innovation and to only see the short-term

For too long Congress has treated the funds dedicated

benefit of a new law or a change in rules and regulations.

to the US PTO as a political football. It should instead

To ensure a brighter future at home—and for the rest of

see those funds as indispensible feedcorn to help bolster

the world that depends on the success and vitality of the

U.S. innovation.

United States—innovation and new enterprise must be at

A pro-innovation Congress will ensure that the PTO

the center of all that we do. Q

can adequately compensate its examiners, hire enough of them, and encourage capable individuals to work at

Nick Schulz is a National Chamber Foundation

the patent office. Otherwise, an innovation bottleneck is

Scholar and a frequent contributor to the

created, where productive ideas in biotech, life sciences, materials science, mechanical engineering, and more are held in limbo and unable to get financing.

Business Horizon Quarterly. He is the coauthor of From Poverty to Prosperity and serves as the DeWitt Wallace Fellow at the American Enterprise Institute. Read his full biography on page 64.

It’s worth noting that there’s a robust discussion taking place about the proper scope of patent protection.

Patents that are overly broad, for example, can become a hindrance to innovation. So, one reason to make sure the patent office has the resources it needs is to ensure that only patents of high quality receive protection. // S T R A T E G Y F O R I N N O V A T I O N !"!#$