Innovation Shouldn't Be Left to Chance

December 2004 / January 2005 By: Norman Augustine Volume 2 Number 6

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A lot has been said about exporting jobs from America; a lot has also been written. But there is also a lot that can be done. Initially, assembly jobs moved abroad, then component manufacturing. Next, the disappearing jobs began to move up the value chain to include software, design and even research. The reason for this trend is simple: We live in a highly competitive global marketplace, a marketplace which does not respect geographical boundaries. The beginning wage of an assembly worker in Vietnam is about twenty-five cents an hour—€”less than most U.S. firms pay for medical coverage for their employees. A qualified engineer in India can be hired for less than one-tenth the cost of his or her U.S. counterpart. In Russia, the cost is still lower. The only possible answers to this dilemma, at least from the standpoint of U.S. employees and employers, are either to move abroad and adjust one's standard of living accordingly or become vastly more productive here at home.

During the recent half-century over half the newly created jobs can be traced to innovation in the fields of science and engineering, a trend which is likely to prevail and intensify in the present century. So how are we doing in the areas which underpin the innovation which in turn underpins our economy?

The U.S. graduates fewer than half as many engineers as Japan; one fourth as many as China. U.S. 12th graders finish 15th out of 16 among world nations taking advanced math tests; 16th out of 16 in science. U.S. industry is decreasing its spending on basic research, particularly high-risk, high payoff research, as it responds to the pressures of the marketplace for fast, certain returns. Meanwhile, the U.S. government, which has become the primary source of funding of basic research, has reduced its R&D support over the last half century from nearly 2 percent of the GDP to well under 1 percent. The very substantial recent increases in funding of the biological sciences are to be applauded, however, funding of the "physical" sciences (chemistry, physics, mathematics and engineering) have actually declined in real terms in recent decades.

One in twenty U.S. undergraduate degrees are awarded in engineering. In China, 40 percent are in engineering. Many of the best and brightest in the U.S. are attracted to law, banking and business where the financial rewards are more attractive. U.S. universities, even in this burgeoning high-tech world, are graduating fewer engineers today than they did a quarter of a century ago. In fact, the U.S. now ranks 17th in the world in the proportion of its 18 to 24 year-olds who earn engineering degrees.

The impact of these trends is perceptible. Fully half of U.S. patents now go to non-U.S. citizens. In the last two decades, the U.S. share of global high-technology exports fell from 30 percent to 17 percent. The number of articles in the Physical Review authored by U.S. researchers in 1980 was substantially larger than the rest of the world—€”today it is less than either Western Europe or Asia taken alone. The fraction of Nobel Prizes awarded to U.S. researchers is also declining.

Some of these trends are inevitable and even to be welcomed as other nations raise their standards of living, but if continued indefinitely the U.S. can expect to see jobs, even high quality jobs, continue to move abroad, with a concomitant decline in the U.S. standard of living.

The following 10-point plan would help assure that innovation in America prospers and that we do not continue to eat our seed corn. It will not be inexpensive, but the jobs it would create, the boost it would give the economy, the additional tax receipts it would generate, would in all probability more than offset its costs.

1. Increase federal spending over the next five years on research in the physical sciences (chemistry, physics, mathematics, engineering) to 1 percent of the GDP.

2. Significantly, increase the fraction of federal spending on research, which is devoted to high-risk/high-payoff endeavors, patterning this practice along the lines established by DARPA, In-Q-Tel and the NSF's newly created Pioneer Awards.

3. Revamp the nation's public schools to reap the benefits of the free enterprise system, which has served America's higher education and overall economy so well, by including school choice, high-pay for high-performing teachers, increased use of standards and measures with consequences, and reducing the significant amount of public school budgets that go to activities other than instruction.

4. Streamline the administrative processing (not necessarily the criteria) for visa applications by foreign students wishing to study in the U.S. Grant foreign students graduating from U.S. universities in science and engineering priority when applying for work permits and citizenship. The decline in U.S. citizens performing graduate work in U.S. universities in such fields as engineering has, to date, been offset to a considerable degree by the influx of foreign students. In fact, nearly 40% of all individuals living in the U.S. holding Ph.D.s are foreign-born. But much has changed since 9/11. In 2003, non-citizen applications to U.S. academic institutions dropped by approximately one-fourth—€”and an increasing fraction of students who do attend such U.S. institutions are now returning home after receiving their degrees.

5. Repair the existing litigation system in the U.S., which is estimated to cost U.S. firms over 2 percent of the GDP in tort liabilities alone, a figure only slightly less than all U.S. spending on R&D (2.5 percent) and double U.S. spending on research (1 percent). Steps would include eliminating contingency fees, providing increased free legal services to those warranting (and needing) such support, and requiring plaintiffs to pay costs associated with suits ruled by judges to be basically unjustified (not just "frivolous"). Similarly, damage awards should be limited to reasonable levels, with a greater proportion of those awards going to the injured rather than to their attorneys.

6. Review the cost-benefit relationship attributable to elements of the regulatory system. Responsible regulation is critically important, but the cost to U.S. firms of today's system has been estimated to be higher than that borne by firms in 30 of its principal competitor nations. In the U.S., costs of compliance have grown by a factor of ten in the last half century.

7. Establish a capital gains schedule whereby the magnitude of tax due on an investment is inversely—€”strongly, and step-wise—€”proportional to the time the asset underlying the gain is held. This would encourage executives to take a longer-term perspective of how they invest their corporation's funds. Similarly, research and development tax credits should be expanded and CEO compensation should shift to recognize long-term performance of their firms.

8. Create a system of competitively awarded federal scholarships and fellowships for U.S. citizens studying science and technology.

9. Establish a Manhattan Project to develop advanced sources of energy suitable for use on a large scale, including but not limited to more efficient hybrid vehicles, fuel cells and nuclear fusion. This would not only reduce the heavy burden on industry represented by the cost of energy and enhance the natural environment but would also attract students to the fields of science and technology.

10. Establish a series of regional science and technology incubators around the country patterned after those already in existence at such places as Stanford and MIT. Studies have indicated that research at MIT alone has generated over 4,000 companies with over a million employees. Such incubators should be designed to encourage, not discourage, cooperation among our nation's universities, industry and government.

The situation in which America is increasingly finding itself with regard to its innovation enterprise did not occur overnight. It is not a partisan issue; it is a national issue. It is an issue about which all Americans should be concerned if our nation is to prosper in the highly competitive global marketplace of the 21st century.

Norman R. Augustine is the retired chairman and CEO of the Lockheed Martin Corporation and co-chair of the Advisory Committee of the National Innovation Initiative.