Innovation-Based Economic Security

By Laura D. Tyson, Bruce R. Guile

The United States is at a crossroads in science and technology policy. Since the end of World War II, US government support for the creation and dissemination of new science and engineering knowledge has been justified on the grounds that it addresses health, environmental, and other major social challenges shared by nations around the world; fosters both national and global economic growth and development through innovation (and the development of innovation-capable talent); and strengthens national security.

Today, 30 years after the end of the Cold War and the invention of the World Wide Web, cross-border exchange and collaboration in science, engineering and innovation is ubiquitous. The US share of annual global public and private research and development (R&D) expenditures is less than 30%, down from 70% in the decades following World War II. Cross-border collaborative research, personal exchanges and migrations, and international supply chains have fused much of the world’s capability in science, engineering, and innovation into large, fast, dense, global networks. Every country, including the United States, now depends on knowledge and innovation from outside its borders for both economic prosperity and national security. 

The rapid growth and integration of global capabilities caught the United States, long accustomed to being dominant in both science and innovation, off guard.

The rapid growth and integration of global capabilities caught the United States, long accustomed to being dominant in both science and innovation, off guard. The rise of China as a science and engineering powerhouse, as well as an overt economic and geopolitical strategic competitor to the United States, has alarmed US politicians and policymakers. Policy discussions about “decoupling” from Chinese science and engineering, and multi-billion dollar proposals for US government domestic R&D investment to achieve an ill-defined “win” in an innovation competition with China, ignore the reality of globally networked scientific and engineering capabilities and innovation processes. 

When compared with policies for national security, which contain both goals and the means to reach these goals, the United States does not have a global science and technology strategy. Today, it largely responds to the actions and tech-based industrial policies of other nations (or coalitions such as the European Union). It is time for the US to adopt a new aim for science and technology (S&T) policy, that of achieving economic security through innovation, with a coherent set of organizing principles that allow the government to analyze progress, distribute resources, and coordinate actions. 

A non-strategy strategy

The American R&D and innovation system depends heavily on government for research funding, on universities as research performers, and on companies for development funding and innovation. For better or worse there is very little orchestration. Rather, the US system depends on a loose collection of goals and principles for direction.

One way to understand how the system works is to look at where the money goes. In 2020, the US federal government spent approximately $164 billion on research and development, about two-thirds of which was focused either on health or defense R&D. The bulk of this government supported research—probably exceeding 80%—is destined for open publication of results. Taking a different slice through the data on US government R&D spending, about $43 billion, or 26% of the total, can be characterized as “basic” research and predominantly curiosity driven.

The Departments of Defense and Energy, and agencies including NASA, the National Oceanic and Atmospheric Administration, or the National Institute of Standards and Technology, define their own mission-driven research needs and jockey for funding. Research funding agencies such the National Science Foundation and the National Institutes of Health also compete for funding, but the mission for such entities is the advancement of knowledge, the development of talent, and curing disease. While program managers in mission agencies exercise some direct control of research performed outside of government laboratories, the primary mechanism of strategic control (especially of university-performed research) by government is to make funding rich in some areas and lean in others.

Meanwhile, American companies spend about twice as much as the US federal government on R&D, though very little of that is destined for open publication and only a tiny fraction is basic research. The quantity of investment is both a testimony to the technological intensity of US industry and to the impact of government R&D tax incentives—one of the primary ways the government influences such private spending, albeit at arm’s length. 

This non-strategy, a tremendous success for the past 70 years, is now challenged by the globalization of public and private R&D capabilities and the approaches taken by other nations.

The patchwork nature of government influence over private R&D investment is revealed by considering activities such as capital market regulation, antitrust policy, data privacy laws, and environmental and labor market regulations. These have all evolved subject to a variety of policy and interest group pressures but without any central organizing principle with regard to their impact on national scientific and engineering capability. The same is true of most international economic policies and agreements such as taxation of foreign earnings and trade and investment agreements.

Thus, absent a coordinated science and technology strategy, the US approach to science, engineering, and innovation includes a wide variety of aspirations. These include the goals of advancing knowledge, economic growth, and international competitiveness, as well as the principles of public funding for defense, health, and curiosity-driven research. In addition, companies bear primary responsibility for innovation and the nation depends on a working, complementary relationship between government supported research and private innovation to capture the social and economic value of advances in scientific and engineering knowledge.

This non-strategy, a tremendous success for the past 70 years, is now challenged by the globalization of public and private R&D capabilities and the approaches taken by other nations. Most R&D-intensive nations bias government R&D funding toward domestic industries other than health and defense, taking approaches that often include government-industry-university collaborations explicitly aimed at improving national performance in trade or strengthening a country’s geopolitical and economic position. 

Recasting goals and principles 

As the United States faces a new reality in the nature of global knowledge flows and innovation networks, a new approach is needed. To catch up and keep up, the United States needs to shift away from trying to use domestic R&D investment to “win” an international competitiveness battle and toward using S&T policy to pursue economic security, which means reducing geopolitical vulnerability in combination with improving economic growth and stability. 

This simple recasting of the goal—to innovation-based economic security—opens up many possibilities that currently seem closed. For one, it motivates the country to find a better way to monitor the US and global S&T enterprise and, importantly, manage the inevitable tradeoffs and fights among constituent groups as new resources are allocated to meet new goals. Second, it promotes working with allies such as the G7 nations, the European Union, and liberal democracies around the world in the name of shared economic security. Finally, it encourages a different and more effective evaluation of government actions such as expenditures on R&D, economic policies, and regulatory changes. These evaluations may consider how S&T affects the country geopolitically, in terms of economic growth, in the competitiveness of the United States as a location for company activities, and in consumer well-being. 

There are (at least) six ways in which the goals and principles of US S&T policy should be recast to support innovation-based economic security:

1. Move beyond insular “more is better” logic for domestic R&D. With the exception of fairly narrow areas—such as the military, cybersecurity, or biosecurity—the results of US domestic research and innovation will become fully and quickly understood, and often applied, around the world. This argues forcefully that the US government should blend domestic R&D investments with cross-border R&D collaborations. Articulated as a goal, the challenge to US government entities is to blend domestic R&D investment plans with international collaborations to take advantage of S&T capability outside the United States. These need to be paired with institutional innovations to improve the country’s ability to capture economic or national security value from scientific and engineering advances originating outside the United States.

2. Address cross-border supply chain vulnerabilities as a matter of national economic security. National economic security vulnerabilities related to mature industries are often a direct result of privately organized cross-border supply chains and their role in innovation. Consider, for example, the location and control of semiconductor manufacturing, which is determined by private companies. There is no obvious precedent for US government regulation or intervention with regard to cross-border supply chains to improve US innovation-based economic security. The tool set currently available to the government to address these issues resides almost entirely within the national defense enterprise, from the Committee on Foreign Investment in the United States (which has the power to limit some investments from abroad) to the Defense Production Act (which allows the government to dragoon private companies into public service). The goal of addressing cross-border supply chain vulnerabilities as a general matter of economic security may require new legislation. It also suggests that the executive branch needs to establish some non-defense standing capacity for early identification of vulnerabilities, perhaps a government entity that can trigger a reconciliation or supply chain reconfiguration process before a crisis develops.

The executive branch needs to establish some non-defense standing capacity for early identification of vulnerabilities, perhaps a government entity that can trigger a reconciliation or supply chain reconfiguration process before a crisis develops.

3. Make holding onto new, emerging, and technology-intensive industry activity a national priority. Thirty years ago, “founded in the United States” meant that the country would capture economic returns—employment, taxes, profits, and consumer surplus—from US tech-based start-ups. Two global trends threaten this relative US strength. First, many non-US centers of tech-based start-up activity are gaining strength, from Shanghai to Munich to Tel Aviv. Second, three decades ago the phrase “multinational company” was synonymous with large companies, but the globalization of knowledge and talent networks now means that many small tech-based start-ups are multinational enterprises. As a result, even new industries invented and created in the United States are less likely to stay in the country, whether because they are acquired by non-US firms or because business or technical opportunity leads them abroad earlier.

Of course, not all technology-intensive industries are start-ups. There are clear innovation and economic security benefits to the United States being the location of production in mature industries, such as many types of advanced manufacturing, with a deep and broad technical base. Location decisions of company activities are affected by many factors, including ownership, history, market access, taxes, regulation, and antitrust laws. But US S&T policy has a critical role, particularly in how the government supports domestic production activities through translational R&D activities and technical support (such as agricultural or manufacturing extension).

While not a comprehensive solution, a federal program to beef up US research universities’ role in start-up and mature company retention may be the best available approach. Research universities have a proven ability to blend early-stage open research with a learning environment that can simultaneously support human capital development and entrepreneurial risk-taking. A federal grant program aimed at research universities that requests proposals to increase long-term retention of company activity in the United States would be a good first step. The tools available in working collaborations between the US government and entrepreneurial research universities—from intellectual property licensing preferences to incubators and university-adjacent, industry-focused R&D institutions—exceed those available to the government alone. With one eye on the models found in Germany’s Fraunhofer Institutes, the Netherlands’ Organization for Applied Scientific Research, and the United Kingdom’s Catapult Centers, the United States should begin working to retain tech-rich company activities.

4. Make the quality and flexibility of the US technical workforce an economic security priority. The ability of the United States to capture benefit from domestic R&D and global knowledge networks depends on the quality and flexibility of the US technical workforce—from technicians, engineers, and bioscience professionals, to PhD researchers and tech entrepreneurs. From the perspective of innovation-based economic security, disparate policies—in particular, education, training, and retraining in science, technology, engineering, and math; immigration; and labor market policies—need to be understood, compared to approaches in other nations, and evaluated as a de facto US human capital strategy that will limit or improve the country’s innovation-based national security. 

In comparison to many other R&D-intensive nations, US federal investment in education and retraining is a mixed bag. On the one hand, US per student spending for both secondary and tertiary students is much higher than the average among the 32 nations in Organisation for Economic Co-operation and Development. On the other hand, OECD data from 2018 show that US public spending on labor market programs (including unemployment benefits, training, and direct job creation), is second-to-last as a percentage of gross domestic product (GDP), with only Mexico spending at a lower rate. The US level of 0.25% compares to an average of 1.1% among the nations in the OECD data set, with countries including France and Denmark spending or exceeding 2.5% of GDP. Further, US federal and state incentives for private employers to invest in human capital are uneven at best and in many cases nonexistent.

A federal program to beef up US research universities’ role in start-up and mature company retention may be the best available approach.

On immigration, it is widely acknowledged that a significant portion of the US research and technical workforce came to the United States for higher education and stayed, collectively making a tremendous contribution to US economic security. Nonetheless, calls to give permanent residency to foreign students as soon as they graduate have not yet succeeded, so the United States continues to lose talent to opportunities elsewhere.

5. Make S&T a permanent priority in all US government international agreements. International economic, S&T, and regulatory agreements increasingly shape US domestic innovation and the nation’s ability to capture economic value from innovation. While the government has made efforts to keep pace in some relevant areas of international agreements (e.g., intellectual property rights, research services as a component of trade in services, and foreign direct investment), the United States has fallen behind in areas such as cross-border data privacy and antitrust law.

This means the entire domain of US positions on, and engagement in, international agreements directly or indirectly affecting cross-border S&T collaboration and exchange is desperately in need of attention and coordination. As with other functions directly relevant to US economic security, responsibility for the relevant international agreements is balkanized among different departments and independent agencies. To advance US innovation-based economic security, the full range of international agreements affecting private and public scientific and engineering exchange and collaboration needs to be given concerted attention at a high level of the federal government. 

To advance US innovation-based economic security, the full range of international agreements affecting private and public scientific and engineering exchange and collaboration needs to be given concerted attention at a high level of the federal government.

6. Create R&D alliances for economic security. In the years following World War II, the United States helped build and manage stable national security alliances. In the twenty-first century, the nation must establish similar economic and innovation alliances as a bulwark against combined economic and national security threats arising from both strategic competitors and malign actors. The US should immediately focus on developing new multilateral sovereign-to-sovereign agreements for mutual protection against threats (to energy, food, health, or defense readiness) arising from exposures associated with global supply chains. Another priority should be agreements to contain new types of tech-dependent threats, especially those related to dual-use technologies such as artificial intelligence, cybersecurity, social media vulnerabilities, or biosecurity and public health. The June 2021 Research Compact among G7 nations is a good start.

New economic security agreements should not dampen economic competition among companies based in different signatory nations. Rather, the intent is to facilitate cross-border economic activity by agreeing on threat-reducing rules and protections governing economic activities, including the exchange and use of new scientific and engineering knowledge. In this regard, the United States has a large set of natural allies among liberal democracies. 

The intent in forming these alliances is not to throw up immediate barriers to working with non-democratic regimes. Economic security alliances allow countries with similar government structures, operating practices, and core values (such as consent of the governed) to work together freely even as they negotiate, perhaps with one voice, with nonagreement countries.

Monitoring the enterprise and managing tradeoffs

After decades of operating with very little orchestration, and in a world where the United States was dominant in science and engineering capabilities, the US government needs to change the way it coordinates S&T policy with economic and regulatory actions and international agreements that affect innovation-based economic security.

Responsibilities and operational capabilities important to innovation-based economic security are spread across a large number of departments and independent agencies. As such, the White House needs to reconcile and coordinate approaches and responsibilities—much as it is currently doing by addressing climate change as an administration priority. The most important, unfilled role is an integrative analysis and strategy process that can advise the president. A similar logic for strategy development and coordination in the White House supported the establishment of the National Security Council (founded in 1947), the Office of Science and Technology Policy (founded in 1976), and the National Economic Council (NEC, founded in 1993).

The US government needs to change the way it coordinates S&T policy with economic and regulatory actions and international agreements that affect innovation-based economic security.

Given the histories, capabilities, and focus of these three groups, the NEC seems best suited to lead and coordinate government actions focused on economic security. No other extant group within the White House has the depth of domestic and international economic capability necessary to advise the president on the inevitable economic tradeoffs. This includes understanding that some US S&T policy actions are necessarily in response to the industrial policies of other nations. The NEC has the credibility necessary to deal with the Departments of Defense, State, Treasury, and Commerce, and the office of the US Trade Representative on matters of economic security. Finally, most US government policies with inadvertent impact on private R&D and the advanced technology activities of companies are lodged in domestic or international economic policies; the NEC has the analytic capability to identify and recommend ways to shift economic policies to be supportive of company R&D and US value capture from technological advances. 

Reconfiguring US science and technology policies, practices, and institutional relationships—at the pace necessary to catch up with changes in the world and the tech-based industrial policies of other nations—will be challenging and needs to start immediately.