By Evan D. Robertson, Project Associate.
Innovation takes time; it is not a short-term endeavor. With all the hype generated on innovating our way out of the Great Recession’s aftermath, we seem to be under the impression that innovation is a quick fix for our troubled economy – currently, this belief dominates the public debate over job creation. Four years, and bam, jobs galore, America’s competitive position is restored. However, as Robert Atkinson, founder and president of the Information Technology and Innovation Foundation, pointed out during his webinar Innovation Economics: The Race for Global Advantage, America suffers from “innovation atrophy.” While the world was busy pursuing and reforming policies to promote innovation, America rested on its laurels. In 2009, the United States spent just 2.9 percent of its GDP on R&D, a figure that lags Israel (4.46), Sweden (3.61) and Japan (3.36) according to the Organization for Economic Cooperation and Development (OECD). Our aggressive innovation policies, once first-class during the 1990s, are being overtaken as Atkinson pointed out.
Simply put, we got complacent. While we were riding the thrill of the real estate bubble, foreign governments across the globe were reforming and adopting policies to create real wealth, and real competitiveness in their economies. Atikins cited as key reforms policies such as the patent box, which reduces the taxes a corporation pays on its intellectual property by half, and a program that gives a $25,000 “innovation voucher” to companies so that they can by purchase innovation services from research institutions. Meanwhile, other countries pursued extremely aggressive and often times illegal practices. China began requiring that foreign companies enter into joint ventures with local Chinese-owned companies along with stipulating technology transfers of intellectual property entering into Chinese markets. Not illegal, just the cost of doing business in China. This, in conjunction with rampant intellectual property theft and blatant corporate espionage, has left America at a severe disadvantage relative to the rest of the world.
So, what do we do to regain our lost competitive edge? Robert Atkinson operationalizes the solution into the 8 I’s:
- Inspiration
- Intention
- Insight
- Incentives
- Investment
- Institutions
- Information Technology
- International Framework
Although he didn’t go into detail over every one, he did focus on two during today’s webinar. In terms of incentives, he recommended a strong expansion of our current research and development tax credit to include workforce development, worker training, and industrial machinery, as well as lowering the corporate tax rate to put us on par with, or perhaps surpass, most OEDC countries. At the state level, he recommended economic development incentive reform to ensure that states use incentives only to invest in things that actually create value for a company as well as the community. In this respect, he suggested that incentives be limited to building innovation capacity and productivity within a company seeking public investment.
Along with the incentives overhaul, Atkinson says that we need also rethink our institutions. One example he pointed to was the New County School in Minnesota, a high school focused on project-based learning. Students at the school are engaged in completing projects. Instead of lecturing “at” the students, adults take on a mentorship and facilitation role. This model has also been extremely successful at the University of Cincinnati’s Live Well Collaborative. Employers have begun to catch on since they realized they didn’t want to employ people with a bunch of knowledge crammed into their head in the first place. What they really wanted were employees who can work in dynamic teams, deal with and anticipate the unexpected, think creatively, and problem solve in a group environment. Our lecture-style classrooms no longer fill this need.
But what I thought was the most important takeaway was mentioned briefly during the Q&A session: the American innovation system doesn’t reward long-term, strategic investment. Our financial system is predicated on short-term returns and quarterly reports. As Atkinson mentioned during the webinar the average time an investor holds a stock has decreased from six months to around a few seconds thanks to high-frequency trading. One missed earnings report, even if a company invested in long-term innovation capacity, can tank a stock, erasing billions in a company’s market value, pressuring the CEO to protect shareholder value. Investors flee because the performance didn’t live up to their “expectations.” Since the CEO remains beholden to shareholders, then you can begin to see why CEOs must remain ever-conscious of their stock’s performance, and those pesky quarterly earnings reports. Thus, it is understandable why a CEO would choose an investment that has a payoff in two years over one that may have a large, but uncertain payoff in 10 years. Incremental innovation trumps long-term systemic innovation. Our incentives for systemic innovation are just not quite there. Whereas other countries such as Germany weigh their investment decisions on a longer time frame. Capital is their tool, not their deciding factor.
I don’t want this to sound like the silver bullet solution; this is economic development after all. Our innovation system requires a holistic rethink, and one in which we need to get everything right, from national to local policy. As Atkinson suggested throughout the webinar, we seem to have at least got the local level policy (state, metro, and city) under control. Now it is time to focus on federal innovation policy, keeping in mind that they must nurture the pioneering policies in place at the local level.
But what I thought was the most important takeaway was mentioned briefly during the Q&A session: the American innovation system doesn’t reward long-term, strategic investment. Our financial system is predicated on short-term returns and quarterly reports. As Atkinson mentioned during the webinar the average time an investor holds a stock has decreased from six months to around a few seconds thanks to high-frequency trading. One missed earnings report, even if a company invested in long-term innovation capacity, can tank a stock, erasing billions in a company’s market value, pressuring the CEO to protect shareholder value. Investors flee because the performance didn’t live up to their “expectations.” Since the CEO remains beholden to shareholders, then you can begin to see why CEOs must remain ever-conscious of their stock’s performance, and those pesky quarterly earnings reports. Thus, it is understandable why a CEO would choose an investment that has a payoff in two years over one that may have a large, but uncertain payoff in 10 years. Incremental innovation trumps long-term systemic innovation. Our incentives for systemic innovation are just not quite there. Whereas other countries such as Germany weigh their investment decisions on a longer time frame. Capital is their tool, not their deciding factor.
I don’t want this to sound like the silver bullet solution; this is economic development after all. Our innovation system requires a holistic rethink, and one in which we need to get everything right, from national to local policy. As Atkinson suggested throughout the webinar, we seem to have at least got the local level policy (state, metro, and city) under control. Now it is time to focus on federal innovation policy, keeping in mind that they must nurture the pioneering policies in place at the local level.
