Facing the Global Competitiveness Challenge

The United States today faces a new set of economic challenges. Indeed, for the first time since the end of World War II, U.S. global leadership in innovation is being brought into question.

During the past 15 years, the rise of China, reform in India, and the end of the Soviet Union have added more than 2.5 billion relatively well-educated but low-wage people to the world labor force. China, India, Russia, and Central Europe are all making significant investments in higher education, emphasizing mathematics, science, and engineering. The spread of the Internet and the digital revolution have combined to introduce international competition to a range of service occupations that were previously shielded from overseas rivals.

New competitors in Asia and the old Soviet sphere of influence as well as old rivals in Europe and Japan are making strides in adapting the U.S. model of innovation to their own economic institutions and tradi tions. New and old competitors are now seeking to attract the stu dents, professors, engineers, and scientists that for years viewed the United States as the principal land of opportunity.

The United States has met and overcome economic challenges before. In the 1980s, this country struggled with severe inflation, stagnant productivity growth, and rising international competition. Driven in part by a fear that Japan was becoming the world’s major industrial power, government and private-sector actors worked in tandem to forge changes that once again made the United States the world’s dominant economy.

When the United States entered the 21st century, it faced yet another set of difficulties: the collapse of a financial bubble, a slowing economy, the tragic attacks of 9/11, and a series of corporate scandals. Yet a public-sector focus on stimulating the economy and a still more productive private sector combined to move the economy back toward growth by 2003.

Too many Americans see the 1980s and the country’s recent return to economic health as an all but effortless inevitability, a simple demonstration of the United States’ unique economic prowess. But it is a dangerous mistake to take economic growth for granted. Meeting the challenge of one major competitor does not prevent other rivals from emerging. Short-term recovery can mask longer-term challenges and lead to a comforting yet corrosive complacency.

In the face of emerging and still unforeseen challenges, the United States can find promise in the strategy that helped bring it past success. The experience of the 1980s led to public policies that helped propel the prosperity of the 1990s. At the heart of those policies was a systematic focus on innovation as the key to future growth and prosperity. Yet today the nation seems to have lost that focus. It needs to regain it and to update and broaden the types of competitiveness policies that served it so well in the past.

A competitiveness strategy emerges

The 1970s’ combination of stagflation and growing international competition gave rise to a competitiveness movement that emphasized a complementary set of policies to foster long-term productivity growth. The competitiveness strategy can be traced to the 1979 and 1980 reports of the Joint Economic Committee, chaired by Senator Lloyd Bentsen. It received added definition and political support in Rebuilding the Road to Opportunity, published in 1982 by the House Democratic Caucus.

The 1985 report of the President’s Commission on Industrial Competitiveness (known as the Young Commission after its chairman John Young, then the chief executive officer of Hewlett-Packard) fully embraced the focus on long-term productivity growth and also advocated a series of specific steps to be taken by the private and public sectors. The Young Commission report spelled out four complementary public policies that have set the broad outlines of a national competitiveness strategy:

Investment: Create a climate that encourages public and private investment.

Learning: Emphasize education, training, and the continuous acquisition of new skills.

Science and technology: Add an active technology policy to the existing commitment to basic science.

Trade: Promote U.S. exports and adopt a foreign economic policy that seeks to open markets around the world.

Almost four years of congressional work culminated in the Omnibus Trade and Competitiveness Act of 1988, which incorporated and expanded on the broad strategic focus of the Young Commission.

Economic policy in the 1990s followed the outlines of the competitiveness strategy. Presidents Bush and Clinton reduced deficits to improve the climate for investment, supported higher standards for K-12 education, and actively negotiated trade agreements. Clinton added an aggressive approach to promoting U.S. exports. Bush provided initial funding for thetechnology initiatives created by Congress in 1988, and Clinton sought sharply increased funding for technology programs, added impetus to the 1980s initiatives designed to speed the transfer of technologies from universities and the national laboratories to the commercial market, and actively promoted the spread of the Internet. Beyond education, Clinton emphasized training and lifelong learning as necessary to prepare Americans for an era of rapid change and global competition.

How much did the competitiveness strategy’s focus on long-term productivity growth contribute to the prosperity of the 1990s? Corporate investment rose sharply. Millions of Americans took advantage of new opportunities for education and training. Small manufacturers nationwide sought advice from government-supported manufacturing extension centers on everything from plant layouts to new technologies. By the end of the 1990s, Americans were referring to the Goldilocks economy, in which everything was just right.

The government’s competitiveness strategy did not stand alone. Corporate America became much more efficient and more innovative in the 1980s. Just as corporations were poised to grow in the 1990s, information technology and the Internet created attractive investment opportunities. A series of what economists call favorable supply shocks, including lower oil prices and a strong currency, combined to help keep inflation low.

But the contribution of public policy should not be understated. Not only did it contribute to record-setting prosperity in the 1990s, it also created a useful framework for future economic policy. An economic climate that encourages investment, an outward-looking international economic policy, and a focus on lifelong learning are the elements of a successful and sustainable strategy. Although the roots of the Internet were sown decades in the past, it serves as a powerful daily reminder of the central role of science, technology, and continuous innovation in the United States’ economic future.

New challenges and new conditions

Entering the 21st century, the United States faces a changed geopolitical situation and a new set of economic challenges. The emergence of the digital economy and the global spread of broadband capacity have opened a host of service occupations to international competition. China, India, Russia, much of Central Europe, and other parts of the world are competing successfully for what were once stable, well-paying U.S. jobs. What started with call centers is spreading to encompass everything from chip design to radiology.

Unfortunately, less attention is being paid to the new challenges to the United States’ longstanding position as the world’s innovation leader. Today, many governments are seeking to adapt the U.S. innovation model to their own economic conditions. They are providing increased support for research universities and attempting to introduce other aspects of the U.S. innovation system, including venture capital funds, incubation centers for new businesses, and an expanded role for innovative small companies.

Innovation, of course, requires innovators and entrepreneurs. In the 20th century, the United States benefited from the fortuitous combination of immigrant and homegrown talent. Starting with the rise of fascism in Europe, the United States became home to many talented scientists and engineers. In recent years, the flow of international talent has taken on a thoroughly global cast, with many students, professors, and skilled professionals coming from China, India, and the old Soviet Union. Here in the United States, the GI Bill and a national commitment to science boosted the development of homegrown talent. Now there is a global competition for international talent. More universities in China and India are offering a quality education. Their growing economies offer technical challenges and prosperity at home, and their promising students no longer need to leave their families or familiar culture to find intellectual challenge or financial prosperity. Australia, Japan, and the European Union are aggressively courting foreign talent. The global competition for talent has come just as the United States tightened visa requirements in the wake of 9/11. As a result, universities, businesses, and even the national laboratories have encountered difficulties in maintaining the flow of foreign talent.

The growing international commitment to innovation holds great promise for the United States as well as for the entire world. In the coming decades, we can expect to make greater progress in fighting disease, facilitating communication, improving the environment, and fighting hunger. The trend, however, poses increasing challenges to the current U.S. innovation system. The United States will need to boost investment in research, sharply improve its own education system, and work to remain a magnet for talented students, researchers, and professionals from around the world.

A 21st-century competitiveness strategy

How can the United States remain a leading innovator? What steps should we take today to build on a system that has contributed to health, prosperity, and national security?

The pace and direction of innovation will inevitably affect the health of the whole economy. A supportive climate for public and private investment remains critical. The country also needs to take a long step beyond the philosophy of lifelong learning to think in terms of an integrated U.S. learning system that will extend from before birth to well after conventionally defined retirement. New technologies and global competition will transform education at virtually every level. An outward-looking international economic policy will need to become a policy of full global engagement. As other countries become more innovative, the U.S. public and private sectors will need to become more adept again at borrowing and adapting new technologies as well as innovating at home.

To pave the way for continued worldwide leadership in innovation, the United States needs to take the following six steps:

Regularly assess the U.S. innovation system. The government and the public must have a clear sense of how federal support for R&D fits into the larger national economic system and how both are linked to an increasingly international process of innovation. The White House Office of Science and Technology Policy should prepare a quadrennial report on innovation that would be linked to the federal budget cycle. Much of the necessary data is already collected by the federal government or is available through private-sector surveys. The reports of international bodies and some foreign governments provide a useful overview of international trends. The government should add to its understanding of overseas trends by emphasizing science and technology (S&T) reporting by the State Department’s Foreign Service officers and the Department of Commerce’s Foreign Commercial Service.

Congress should add force to the quadrennial report by giving it a legislative mandate, requiring periodic testimony by the president’s adviser on science and technology and using oversight hearings to encourage government coordination of research efforts.

Build sustained political support for S&T. The president should deliver an annual “State of the Innovation System” address that assesses the current state of U.S. innovation in light of international as well as domestic developments. The president and other elected officials, business leaders, and university presidents need to articulate a clear rationale for S&T that links innovation to long-term prosperity, national security, improved health care, and a clean environment.

Leaders in public and private life need to make an added effort to respond to the two most frequent attacks on technology policy: that it is a veiled form of industrial policy and that it is little more than a fancy name for corporate welfare. The economic case for public spending on basic technologies is much the same as it is for basic science. When markets are not going to spur investment, the public sector needs to decide whether, when, where, and how to fund research. Major companies often have the resources to pursue a research project but cannot justify the effort because the cost is too high, the payoff is distant, or there is a risk that benefits could be appropriated by competitors. The prospect of sharing the costs with other partners, including the federal government, can lead to innovations that foster industrywide or economywide benefits as well as specific corporate ones.

Maintain national strength in a global economy. Innovation was already going global in the late 20th century. Barring a major disaster, that trend will accelerate in this century. A host of countries are investing in the building blocks to become major innovators. Research-based multinational companies are investing around the world to take advantage of scientific talent and to adapt to local markets.

Although growing interdependence is creating enormous opportunities to deepen research and speed the development of key technologies, it also carries risks for foreign policy and could disrupt the domestic industrial basis for innovation. In the decades ahead, leading states will remain an important force in conducting foreign policy

In this century even more than in the last, national security will draw on the successful development and application of a wide variety of new technologies. At times, the federal government has intervened to help key industries regain their strength. For instance, in the mid-1980s, the government used trade policy and helped fund an industry consortium to respond to the Japanese challenge to the U.S. semiconductor industry. Where it proves too difficult or too costly to maintain a U.S.-based industry, government collaboration with private-sector partners can stimulate the development of new technologies or seek out more than one source of supply overseas.

There is also a risk that the erosion of the U.S. industrial base will result in innovations being commercialized overseas without the intervening boost to domestic job creation. In addition, as U.S. manufacturers concentrate in overseas locations, they may turn to research universities in Europe and Asia, thereby shifting intellectual and financial resources away from the U.S. base. In a word, manufacturing still matters.

Some of the change is driven by the logic of companies seeking lower costs or promising global opportunities. In other cases, the overseas advantage is the product of the long-term growth strategies of foreign governments. The public and private sectors need to monitor and evaluate these government strategies as well as international trends as part of a strategy that supports long-term innovation as well as foreign policy independence.

Shore up weaknesses in the innovation chain. U.S. leadership in innovation has been built on a mix of public and private strengths. However, weaknesses continue to exist in several areas.

The post-Cold War decline in defense spending had the unintended consequence of limiting R&D funding for the physical sciences and engineering. During much of the past two decades, spending on the physical sciences has been flat and has actually declined relative to the size of the country’s gross domestic product. Not only is R&D in the physical sciences important in itself, but it also provides knowledge that helps to underpin advances in the life sciences, where federal research support has continued to grow.

Venture capital has emerged as one of the nation’s great strengths. As other countries attempt to adapt the U.S. innovation model to their own economic structures, they often import U.S. venture capital. Venture capital is, however, volatile. At times, venture capital will concentrate on a specific industry—for example, biotechnology (one of the current favorites)—at the expense of other fields. The government could act as a balance wheel, providing a steadier flow of risk capital to a variety of industries. It is time to create a National Institute of Innovation that, like the National Institutes of Health, would provide a more predictable flow of funds to support the development of innovative products and processes.

In 1983, President Reagan’s Secretary of Education, Terrence Bell, issued A Nation at Risk, a scathing assessment of the state of U.S. education. By some measures, the country has not made much overall progress since that time. International comparisons of math and science achievement tell an equally bleak tale. The public and private sectors, universities, and local communities will have to dedicate the funds, the time, and the technologies needed to prepare all Americans to be productive citizens in the 21st century. Hardest of all, the country will need to shake up a culture that neither celebrates science nor understands its fundamental importance.

Support great missions that drive innovation. In the S&T world, great goals drive innovation and attract talent. A generation of scientists and engineers that is nearing retirement was drawn to science by the challenge of Sputnik and the lure of a pledge to put a man on the Moon.

We need to develop 21st-century missions that will meet key national goals, drive innovation, and attract a new generation of scientists and engineers. There are a host of potential projects, including the following three.

First, the United States should make a national commitment to develop new sources of energy that will support economic growth, protect the environment, and achieve the foreign policy flexibility that comes with greater energy independence. Highlighting the link between energy research and national security, reducing poverty around the world, and improving the environment will help capture public support and the imagination of a new generation.

Second, the country should attack new and existing diseases on a global basis. Every nation is only a plane ride away from any disease. The appearance of HIV/AIDS, Ebola, SARS, and, more recently, the avian flu has highlighted the peril of the new. Statistics on deaths from tuberculosis and malaria show the devastation that can be wrought by the old. To nature’s diseases have been added the threat of human-made pathogens. Evaluations of U.S. homeland security consistently rank biological terrorism at or near the top of the list of domestic threats. With the potential to save millions of lives around the world, a national commitment to eradicate the threat posed by new and old diseases will kindle a spark of excitement among young Americans choosing their professional futures.

Third, the nation should apply technology to the challenge of an aging population. The creative use of information technology can help keep seasoned workers active and reduce health care costs at the same time. New technologies can lead to early detection of disease, added mobility, and new cures. The idea of better lives for grandparents will draw another set of talented young people toward science and engineering.

There are many other national goals that could drive innovation. President Bush has announced a new vision for future missions to the Moon and eventually to Mars. In the developing world, there is a tremendous need for clean water and for crops adapted to tropical conditions. The effort to secure the homeland will drive new innovations in information technology, materials, and biology. The United States must choose major goals, provide sufficient funding, and build sustained popular and political support.

Continue to improve the climate for commercialization. Throughout the 1970s and 1980s, the United States was often first in Nobel Prizes but too often second in moving technologies from the laboratory to the living room. Industry responded by adapting lean production methods to U.S. conditions and shifting their research activities closer to the market. The public sector responded by encouraging collaboration among the private sector, national laboratories, and universities; supporting research; and helping facilitate the spread of new technologies.

The public role in fostering a favorable climate for commercialization requires a philosophy that encompasses the entire innovation system and a government that is agile in responding to changing economic circumstances. It will also require the adoption of a comprehensive competitiveness strategy. Steady growth, low interest rates, price stability, adequate research funding, innovation-oriented regulations, and a more flexible government are all-important pieces of the commercialization puzzle, as they are for competitiveness in general.

The Bush record on innovation

In 2000, President Bush campaigned as a compassionate conservative promising improved education, a smaller government, and a more humble foreign policy. Instead of the comprehensive competitiveness strategy of the Clinton years, Bush returned to the supply-side emphasis on the power of reducing marginal tax rates. There was little emphasis on S&T in his approach to the economy. They were largely absent from his initial energy and environmental bills.

The 9/11 attacks and a weakening economy had a major impact on Bush’s economic as well as his foreign policy. What has been their impact on innovation? How has the administration done in terms of funding research, creating new structures for innovation, adopting innovation-driving missions, and strengthening education and other basic elements of an innovative future? The record is mixed.

Funding: The administration has continued to emphasize the life sciences, despite the country’s need to recommit itself to adequate research funding in physical sciences and engineering. The proposed fiscal year 2006 budget takes positive steps in support of R&D in advanced manufacturing but, depending on the agency, reduces or makes only modest increases in funding for the physical sciences and engineering.

Structures for innovation: For the most part, the administration has not focused on creating new or strengthening old structures for innovation. For instance, there has been a consistent effort to reduce or even eliminate funding for the Advanced Technology Program and the Manufacturing Extension Program. There is one notable exception. At the insistence of Congress, the new Department of Homeland Security has its own Homeland Security Advanced Research Projects Agency. Modeled after the very successful Defense Advanced Research Projects Agency, the new agency is still too young to have developed much of a track record.

New missions: The president did seek advice from his administration about broad new missions. He proposed a mission to the Moon as the first step toward reaching Mars. The mission to Mars, however, comes at the expense of proposed cuts in NASA’s aeronautical research. Although President Clinton’s clean car initiative has been continued, the focus of the program has been narrowed to a focus on hydrogen fuel. In 2004, the president called for broadband links to speed the spread of the Internet throughout the country, but this vision has not been followed by concerted public action. In sum, the administration has not adopted a major technological challenge as a way of either driving innovation or attracting the next generation of scientists and engineers.

Long-term competitiveness: Instead of the synergistic elements of a competitiveness strategy, the president appears to rely on tax cuts, market forces, and the United States’ entrepreneurial spirit to assure future growth. Understandably, fiscal policy and monetary policy were initially focused on limiting the economic downturn and fostering recovery. Since the economic rebound in 2003, however, there has not been a renewed emphasis on basic S&T. Nor has there been any concerted action to reduce long-term budget deficits or record trade and current account deficits.

In terms of building blocks for the future, the president has been most active in seeking to reform elementary and secondary education. His No Child Left Behind policy builds on the standard-raising efforts of his father and President Clinton. Although this approach has attracted some criticism, Bush has at least attacked one of the central weaknesses threatening the innovative future of the United States. In his second term, the president has indicated his determination to spread the same philosophy to the nation’s high schools. The administration has also adjusted its excessively restrictive visa policy for overseas students in response to complaints from universities and business.

The administration has been very active on the international trade front, simultaneously pursuing major multilateral, regional, and bilateral trade negotiations. It has not discouraged depreciation of the dollar and has made public efforts to encourage the appreciation of key Asian currencies. So far, a weakening dollar has provided some benefits to the manufacturing sector without producing added inflation.

Like the White House occupants during the Cold War, the administration has its hands full with questions of national security, checking the spread of weapons of mass destruction, and spreading the seeds of democracy. Today, there is the added fear of terrorists crossing porous borders and the use of biological agents, chemical weapons, and/or suitcase-sized nuclear weapons. National and homeland security concerns have certainly stimulated R&D on new technologies. Some of the new approaches will have near-term commercial applications and unknown long-term potential.

The administration, however, has not yet made innovation a key element of its long-term growth strategy. To some observers, the second-term emphasis on Social Security and tax reform, the proposed extension of the No Child Left Behind policy to high schools, and the announced desire for a new approach to immigration does not suggest much room for an innovation initiative.

Yet the potential is there. Concerns about national security could stimulate interest in everything from advanced sensors to an accelerated effort to explore whether hydrogen truly is the fuel of the future. New technologies could transform education, helping the president reach his goals in the nation’s classrooms. If the Social Security debate leads to an overall assessment of the U.S. retirement system, the president and Congress may turn to technologies as a way of improving the lives of the elderly as well as containing costs.

The president’s determination to spread democracy could lead the administration to focus on many of the questions of political stability and economic sufficiency that help lay the basis for democratic governments. The focus on development could in turn create an interest in research on diseases, clean water, and new crops.

Since the early-1950s work of Nobel laureate Robert Solow, economists have stressed the role of innovation in fostering economic growth and rising standards of living. Engineers often propose an even simpler “look-at-what-has-changed-your-life” test— from medicines to the Internet to new materials. During the 20th century, the United States became the world’s most successful economy by adopting and adapting ideas from the around the world while becoming the leader in research and innovation. To deal with the rising global competitiveness challenge, we must now make a renewed effort to bolster our national system of innovation. By doing so, we can help ensure a prosperous future.