William Brody
Compete--or Else
October / November 05
Volume 3 Number 5
In my work with the Council on Competitiveness I have been introduced to a novel concept: the calculus of innovation. When we talk about competitiveness, what we mean is the capacity to increase the real income of all Americans by producing high-value products and services that meet the test of the world markets. It sounds easy, but of course as we all know, it's not. Competition can be brutal.
The need to be competitive with all comers is not an abstraction. It's not some future worry we have time to ignore in the present. American economic competitiveness is a real issue, right now, one that's tremendously important to us all. In recent years, productivity gains have accounted for about two-thirds of the annual growth of our gross domestic product. Much of this gain has come from innovation in the application of technology to business. And this is where the calculus of innovation comes in.
The calculus of innovation is really quite simple:
Knowledge drives innovation;
Innovation drives productivity;
Productivity drives our economic growth.
That's all there is to it. In the roaring 1990s, our knowledge enabled us to innovate, and our innovations increased American productivity, and hence, American economic growth. But there is no guarantee that these productivity gains will continue. And based upon studies I have seen at the Council on Competitiveness, it looks as though the innovation pipeline is slowly being squeezed dry. If current trends continue, many of us on the council believe there is a good chance that U.S. competitiveness in vitally important high-tech areas will fall behind that of China, India and even a resurgent Western Europe. Here's why:
First, we are losing the skills race. About one-third of all jobs in the United States require science or technology competency, but currently only 17 percent of Americans graduate with science or technology majors. By contrast, the National Science Foundation 2004 Science and Engineering Indicators report shows that the world average is 27 percent, Korea's average is twice ours, and in China, fully 52 percent of college degrees awarded are in science and technology.
By way of example, when Harvard polled its entering class recently, it discovered only one percent of their students expressed interest in studying computer science, yet information technology lies at the heart of many of our productivity gains.
Today, foreign graduate students studying science and technology in our universities outnumber their American counterparts. They're terrific students, but historically about 40 percent have left the United States after receiving their degrees. Policy changes since 2001 have made it more difficult to come to the United States, and more difficult to stay. But consider the talent we may be sending away: 35 percent of the doctoral degrees we award in the physical sciences go to foreign-born students, as do fully 58 percent of the engineering Ph.D.s.
Europe now produces more than twice the number of scientists and engineers as the U.S.; and Asia about three times the number. Again relying on National Science Foundation data, the U.S. share of world bachelor's engineering degrees granted dropped in half during the 1990s: from about 12 percent in 1991 to six percent in 2000.
Second, and just as worrisome as losing the skills race, we are beginning to lose our preeminence in discovery as well. Historically, innovation in science and technology has been the direct result of investments in basic research and development. America's longstanding commitment to generously fund R&D has been a major driver of our economic competitiveness.
However, as a percentage of our overall gross domestic product, U.S. federal research and development spending peaked forty years ago-- in 1965, at just under two percent of GDP.
Today, it is now down by more than half, to about 0.8 percent of GDP. And while government spending for medical research has increased, overall R&D spending, especially in basic sciences, continues to decline. As you would expect, these numbers have very real consequences. Science and technology articles published in Western Europe already exceed those in the U.S. By 2010, it is anticipated that the emerging economies of Asia will produce more patents and spend more on R&D than the United States.
Knowledge drives innovation; innovation drives productivity; productivity drives our economic growth. In order to master the calculus of innovation, promote economic growth, and support the genius for innovation and discovery that has been the hallmark of American prosperity for two centuries, we must reaffirm our national belief in the transformative power of knowledge. To do so, we should rededicate ourselves to both transmitting existing knowledge to the next generation through the world's best educational system, and continuing to lead the world in the discovery of new knowledge by aggressively funding research and development in all areas of science and technology—€¦
Talent is our nation's most important innovation asset, and so it is vital that we build the base of scientists and engineers working in this country at the frontiers of new discovery.
Innovation capacity in a modern technological society depends almost entirely on a broad class of scientists and engineers who can imagine, and then implement, bold new ideas. But unless the United States takes action swiftly, the demand for science and engineering talent will soon outstrip supply. The number of jobs requiring technical training is growing at five times the rate of other occupations, yet the average age of our science and engineering workforce is rising, the number of new entrants into fields other than the biological and social sciences is static or falling, and the all-important perception of these jobs as being remunerative, important and exciting career options is declining.
In the knowledge economy, the ability to understand technology, and anticipate the technological foundations of growth, is becoming increasingly critical to every career path.
The trouble is, enrollments are moving in precisely the wrong direction. A quarter of the current science and engineering workforce in America is more than 50 years old, and many will retire by the end of this decade. New entrants into science and engineering fields are not replacing these retirees in sufficient numbers.
We should greatly increase both government and private funding in research, with a particular emphasis on "far out" frontier research that has the potential of creating new industries and transforming how we work and live. It's just like Dale Earnhardt Jr. would tell you—€“-when the race gets tough, step on the gas.
Let me be explicit. I believe we need to fulfill our commitment to double the National Science Foundation budget to approximately $10 billion by FY 2007, as was previously passed by the House. We must significantly increase our basic research efforts in the physical sciences, in mathematics and in the information sciences. And we should do this without robbing Peter to pay Paul by reassigning funds already designated for the life sciences through the National Institutes of Health and other agencies.
The doubling of the NIH budget has been a tremendous boon to biomedical research, and tremendous benefits will be seen in our lifetimes. We should not allow America's real and substantial lead in these fields begin to erode by slowly whittling away at these gains. In order to assure our continuing leadership we need to continue to increase our medical research expenditures at the rate of biomedical inflation, currently about 3.5 percent a year. Anything less than that is, effectively, a cut.
At the same time, we need to find ways to encourage private industry to be more accepting of risks in the form of transformative business practices and technologies, while removing all incentives to engage in the short-term, bottom line thinking that has unfortunately become a hallmark of too many American corporations.
Norm Augustine, now retired CEO of defense giant Lockheed Martin, told me that when he was the CEO of Martin Marietta, the precursor to Lockheed Martin, he one day called in the analysts to announce a series of investments in research that he felt would propel the company way ahead of its competition. Much to his surprise, as soon as he had finished his presentation, the analysts ran out of the room, sold the stock and the price plummeted -- and continued to drop over the next 18 months. Puzzled about the negative reaction to this news, Norm asked one of the mutual fund analysts why the stock had dropped. He was told: "Everyone knows it takes 8 to 10 years for research to pay off. But our shareholders only hold stock less than one year. Our fund doesn't invest in companies like yours that have this kind of management."
The drumbeat of quarterly results are driving business decisions and drowning out long-term management, investment and innovation strategies. Today, investor patience is in short supply, and the traditional "buy and hold" approach to equity investments is being abandoned by the professionals. U.S. mutual funds are holding stocks for an average of just ten months, a record low, and annual turnover rates are 118 percent, a record high. As Norm Augustine discovered, these short investment horizons pressure CEOs to focus on near-term results.
Admittedly, it will be difficult to change Wall Street's attitudes and habits. But it is terribly important to this country that we begin to try to do so. We can use the tax code to reward the behavior of companies that make significant research investments and take significant risks, just as we can find disincentives to short-term, bottom-line-only thinking. In doing so, we will make holding stock of innovative companies over the long term a more desirable investment, and our national economy more competitive.
The legacy America bequeaths to its children will depend on the creativity and commitment of our nation to build a new era of prosperity at home and abroad. The generation of new knowledge through research, and the transmission of existing knowledge in a world-leading educational system are the two essential elements of a productive and innovative society.
Since World War II, America has led the world in science and technology innovations largely because it was willing to make the considerable investments in both its educational systems and its research and development infrastructure that have enabled the natural creative genius of the American people (and visitors to our shores from all over the world) to flourish. If imitation is the sincerest form of flattery, we should be very, very flattered that so many other nations seek to emulate the methods of our succes. But we also must be aware that today, as in no other time in our recent past, we are challenged by other nations equally determined to succeed. As Americans, we wish them ever success—€”except the kind that would come at our own expense.
The race belongs to the swiftest. We must keep running.
William Brody is president of The Johns Hopkins University. This article is based on his testimony this year before the House Science Committee.
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