Innovation's falling fortunes

Alarm is growing in many quarters that America is losing its competitive place in the world. The economy is flagging, unemployment is on the rise, and solutions aren’t readily apparent.

The malaise has gone mainstream. The cover of the June 20 issue of Time magazine bore the words “What recovery?” The article sought to explode five myths about the economy, including the notion that the current downturn is a temporary blip.

The reasons why America is losing its competitive edge are multiple and debatable, and much of the analysis coming from the government is typical partisan finger-pointing. But there are some factors emerging as consistently cited reasons for concern, and one is the government’s increasing reluctance to commit the necessary funds to support research.

The role of the federal government in encouraging and inspiring innovation has been changing year by year. In the days after the 2001 terrorist attacks, federal agencies took a new interest in research and development and provided visible leadership and financial backing in key science and technology fields. And yet even then, policy experts were beginning to worry about the ability of the United States to keep its innovation edge in the face of stiff global competition, as Federal Computer Week reported in a story titled “The Next Bright Idea,” published May 1, 2006.

President Barack Obama, who crafted an innovation agenda early in his term, seems to understand the need for leadership in this area. He made “winning the future” a theme of his State of the Union address in January, and he has talked about the topic repeatedly since then. He has been encouraging government and industry to invest the money needed to keep the United States at the forefront of science and technology R&D.

But the financial investment is getting harder to come by. In the five years since that FCW article was published, the White House has changed hands, Congress’ dynamics have shifted, and much of the talk on Capitol Hill these days is about cutting spending and reducing the federal deficit.

Spending wisely

Many observers believe that even an austerity-minded Congress will keep some money flowing for research. The key concern will be spending it well.

John Backus, founder and managing partner at New Atlantic Ventures, recalled serving on a review panel to award Small Business Innovation Research and Small Business Technology Transfer grants for the National Science Foundation.

“That was eye-opening,” he said. “This was money that had to be spent, it was appropriated, and they basically stacked up the proposals from best-written to worst-written and started awarding money.”

There was little attention paid to whether the research was likely to lead to a marketable product or whether the team receiving the grant had any experience in taking products to market, Backus added.

Government funding is better spent through mission-oriented agencies, such as the Defense Advanced Research Projects Agency and NASA, Backus said. Their scientists and engineers know how to work toward a goal and conduct their research accordingly. He added that he believes that type of funding will remain relatively safe even if budgets are cut dramatically.

In its assessment of the proposed fiscal 2009 budget, the American Association for the Advancement of Science (AAAS) noted that the investment boom appeared to be receding. The boom began around 1998 as the federal government stepped up research spending by the National Institutes of Health. Soon after, other federal agencies increased their investments to take advantage of several years of budget surpluses.

"But with the return of budget deficits in 2002 followed by restraints on domestic spending thereafter, growth in research funding for NIH and other domestic agencies slowed in 2004 and then reversed," AAAS officials wrote in their report.

Likewise, research by the Defense Department dropped off after America's wars in Afghanistan and Iraq forced a shift from research into new technologies to development and refinement of existing ones to meet urgent military needs.

NASA also changed its emphasis from research to development, leading to a decline in research even with relatively stable funding levels, according to AAAS' analysis.

America vs. the world

So where does America stand now?

We are still a leader in innovation, said Alan Merten, president of George Mason University, during a panel discussion on health technology innovation held June 2. “The question is, on this trajectory, how long do we remain a leader?”

The budget numbers suggest that federal R&D funding has been fairly stable recently, with only modest changes each year. According to the National Science Foundation, the fiscal 2009 budget increased federal R&D spending by 2.3 percent compared to the previous year — from $143.7 billion to $147.1 billion.

AAAS noted slight decreases in the continuing resolution for fiscal 2011 compared to fiscal 2010. Specifically, AAAS reported a total R&D investment in fiscal 2011 of $144.4 billion, a 3.5 percent reduction from the year before.

Most of the reduction — $4.7 billion of a total $5.2 billion — came from DOD, AAAS said. The largest cuts on the civilian side came from the Agriculture Department, Energy Department, NIH and the Homeland Security Department. NASA and the Centers for Medicare and Medicaid Services had increases to R&D.

The Obama administration had proposed a budget for fiscal 2012 that would have increased funding for basic research by 11.1 percent and applied research by 9.9 percent, according to AAAS. However, the Senate voted down the president's budget in May, and Congress passed a budget-slashing compromise bill to raise the debt ceiling earlier this month, so the prospects for future R&D funding remain unclear.

Federal innovation funding got a one-time $21.5 billion boost under the American Recovery and Reinvestment Act of 2009. Over the longer term, however, AAAS' data shows a modest year-by-year decline in R&D spending as a percentage of gross domestic product since 2003.

In 2006, Robert Atkinson, president of the Information Technology and Innovation Foundation (ITIF), said he was optimistic that America’s lagging status in innovation could change. At the time, he said America was at “a possible turning point because we’re finally beginning to have a discussion about innovation.”

That change hasn't come. Instead, Atkinson recently said the dynamic that was causing America to lose ground to other regions of the world has accelerated.

Although the United States still leads Europe in many innovation measures, the trends suggest that Europe has made significantly more progress than America since the beginning of the decade, according to an ITIF report published in July 2011 titled "The Atlantic Century II: Benchmarking EU & U.S. Innovation and Competitiveness.”

However, neither is poised to lead the world for much longer. Southeastern Asian nations are outpacing America and Europe alike, according to the report, which is a sequel to one released in 2009. The report shows that although the United States ranks fourth out of 44 countries and regions surveyed on a host of measures of innovation, it is 43rd on the list of most-improved countries.

The United States had ranked No. 1 in innovation in 2000, so slipping to fourth is alarming, the report states. "Of greater concern, however, is the fact that the U.S. continues to rank at the bottom — second only to Italy — on progress in improving its innovation capacity and competitiveness over the last decade," the report states. China and South Korea took first and second places for improving their innovation environments, with Cyprus in third place.

“If this were a NASCAR race, the other teams are getting better and better cars and spending a lot of time learning how to soup up the engine,” Atkinson said. “We have the same car, and it’s starting to leak oil.”

Unfortunately, making the changes necessary to improve innovation won’t be easy.

“We’re perhaps the most politically gridlocked major country in the world,” Atkinson said. “We just can’t do anything anymore because the partisan voices are so loud.” Republicans don’t want to support public expenditures, Democrats are not open to regulatory changes, and “the lobby for innovation is relatively weak still.”

Immigration policy is also a problem. Bright students come to American universities from other countries, but the laws make it difficult for them to stay and put their knowledge to use in the United States.

“I should be able to staple a green card to every diploma” rather than sending foreign students back to their homelands, Merten said.

Part of the problem is that returning home isn’t a bad prospect to many foreign-born graduates these days, Backus said. “People used to fight and jump through hoops to stay here, but now opportunities are pretty good in India, in China,” he said. “Now they can say, ‘If you don’t want me here, I’ll just go back home.’”

Striking a balance

Don’t expect the private sector to step in and solve the problem, Atkinson said. The statistical trend in ITIF's study shows the slowest growth in corporate R&D in the country’s history. And when American companies do spend money on R&D, they spend 2.7 times as much in overseas labs as they do at home, he added.

James Decker, a principal at Decker Garman Sullivan and Associates and former principal deputy director of the Energy Department’s Office of Science, said industry’s wavering commitment prompted NIH to issue a solicitation to assemble a scientific consortium that would conduct research into a drug to break nicotine addiction.

A pharmaceutical company can opt not to invest in an “orphan drug” — one that would treat a rare condition and therefore have a limited market. But it’s surprising that the government needs to assemble a consortium to research a treatment for something as prevalent as nicotine addiction, Decker said.

“It’s not an orphan drug," he said. “It’s a big deal.”

Cynthia McIntyre, senior vice president at the Council on Competitiveness and leader of the council’s High Performance Computing Initiative, said the solution might be to encourage more government/industry collaboration.

“There will always be a role for the federal government and the private sector to partner on R&D,” she said. “Sometimes R&D projects are of such a scale and scope that they require a partnership to achieve the results desired.”

The government’s role is essential, she added. “The federal government is in a position to take the risk of not knowing what the economic return is to be of scientific discovery. They help enable new thought.”

A bigger crisis?

An even more ominous concern is that the economic factors inhibiting spending right now might constitute a lasting change rather than the customary pendulum swing.

“There’s more and more awareness that this isn’t just a big financial crisis that we’ll recover from and everything will be hunky-dory,” Atkinson said. Instead, there’s a growing awareness that manufacturing in America is in serious trouble, and other countries — notably China — are changing policies that had been beneficial to American companies.

“Think about where the economy would be if manufacturing was 25 percent greater than it is today,” he said. “The multiplier for manufacturing jobs and the multiplier for exports [are] twice as high as [they are] for other stuff. We’re not driving growth through manufacturing and exports as we should and [not] getting those big multipliers. And there’s a big fear about whether the U.S. really is doing well.”

However, we haven’t been funding the kinds of technology companies that are likely to create large numbers of manufacturing jobs, said Chris Long, president and CEO of the Center for Public Policy Innovation, a think tank that studies global competition and the effects of government policies.

“We’ve made it very difficult for companies like Apple and Microsoft,” he said. “Twenty-five or 30 years ago, when they were formed, they went on to provide hundreds and thousands of jobs. We’re not investing in those kinds of companies any longer.”

Instead, social media companies and firms that develop smart phone apps and similar technologies get the attention of venture capitalists, Long said. Facebook, for example, “is a great company, and it’s a great business model for them, but they’ve created just over 1,000 jobs.”

Decker, however, is confident that the government will continue to spend money on research, no matter how aggressive the deficit hawks in Congress might sound.

“I think support for basic research will hold pretty well,” he said. “There’s been bipartisan support over the years.”

The spending cuts will more likely affect entitlement programs, he said. “They’re going to have to face up to it some day. The question is, how soon do they face up to it? If they do it early, the pressure on discretionary spending will ease up.”

The economic peril only makes it more important to maintain R&D spending, from government and the private sector alike, McIntyre said.

“We must pay attention to staying competitive in the global market and the global science and engineering arena,” she said. “Intellectual capacity is not the exclusive domain of the U.S. All countries have citizens who participate in science and engineering activities. They go to the best universities in the world. We cannot stand still. We cannot assume we can attract talent from the world. We have to develop the top talent here.”

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