A new report from the Council on Foreign Relations, Keeping the Edge, is one in a series that analyzes where the United States stands in key dimensions of economic competitiveness. It concludes that on innovation, which drives rising living standards in the advanced economies, no other country is even close. For example:
–Of the top 20 universities in the world that produce the highest-impact scientific research, 16 are in the United States.
–Total U.S. research & development spending — most of it by companies — is higher as a share of the economy than at any other time since the early 1960s when the space program was starting. In absolute terms, no other country invests nearly as much in R&D as the United States, and in relative terms only Japan is close. And in a recent survey, the average U.S. corporation said it planned to boost research spending this year by nearly twice the rate of its international competitors.
–The share of the U.S. economy that comes from knowledge-intensive industries has risen sharply over the past decade, reaching nearly 40 percent; no other large economy has even hit 30 percent.
Most of this is a private-sector story. The United States has an entrepreneurial culture that rewards risk; a highly developed venture-capital industry; and a large market of consumers eager to embrace new commercial innovations. But one of the more interesting findings of the report is that — unlike on so many other policies, from immigration to tax reform — the U.S. government has mostly got it right on innovation.
The Small Business Innovation Research (SBIR) program was established by Congress in 1982, during the Reagan administration, and has been reauthorized multiple times with little controversy. The SBIR requires that all federal agencies with big R&D programs set aside 3 percent of their research budgets for small businesses.
The result is a $2.5 billion fund that helps to bridge the so-called “valley of death” that new start-ups face between good ideas and commercial products that are attractive to investors. Apple, Compaq, and Intel all received SBIR funds in the 1980s; today, some 6,500 small companies are beneficiaries. In surveys, 97 percent of those companies said that the grants had been vital to their later successes. Other countries have taken note, with Germany, the U.K., Israel and China all launching similar schemes.
U.S. policy in support of innovation has gotten some other things right as well. Washington relies mostly on direct subsidies, which generally favor new and smaller companies, rather than R&D tax breaks that primarily help established firms. The government has sponsored cheap but galvanizing competitions, such as the Defense Department’s 2004 “Grand Challenge,” offering a million-dollar prize for a driverless car that could navigate a desert course. No one took away the award, but it pushed forward research that is only now coming to fruition.
The U.S. university system, with its mixture of public and private support, autonomous administrations, and competition-based funding for research, is also uniquely successful at generating commercially relevant research breakthroughs. The system can be improved significantly, but it has fueled world-changing innovations. Other countries are trying to find the U.S. secret sauce, but without much success.
The report does highlight some red flags. Funding for public universities, such as the vaunted University of California system, for example, is under enormous pressure. So too is funding for basic scientific research. Massive research undertakings, such as the quarter-century-long Human Genome Project, which has paved the way for breakthrough drug therapies, are impossible without generous taxpayer support for basic science. Entrepreneurs can work hand in hand with universities in commercializing scientific breakthrough, but they can’t invest the time and money to create them.
Innovation also arises from the talents and ingenuity of those residing in this country, and immigrants have long brought a disproportionate share of that precious resource to the United States. The decade-long failure to reform immigration laws to welcome the best and brightest remains a deep, self-inflicted wound.
But amid so much of the hand-wringing in Washington, the report tells a remarkably positive story. When it comes to the scientific breakthroughs and commercial innovations that are building the economy of the future, the United States really is number one — and no competitor is in sight.
Edward Alden is a senior fellow and director of the Renewing America initiative at the Council on Foreign Relations.