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The Future of Innovation

By Frank Voehl

"The first step to winning the future is encouraging American innovation." That was Barack

Obama in his State of the Union address last January, when he hit the theme repeatedly, usingthe word innovation orinnovate 11 times. And on this issue, at least, Republicans seem in syncwith Obama. Listen to Mitt Romney or Newt Gingrich or Mitch Daniels and the word innovationpops up again and again. Everyone wants innovation and agrees that it is the key to America'sfuture.

Innovation is as American as apple pie. It seems to accord with so many elements of our nationalcharacter ingenuity, freedom, flexibility, the willingness to question conventional wisdom anddefy authority. But politicians are pinning their hopes on innovation for more urgent reasons.America's future growth will have to come from new industries that create new products andprocesses. Older industries are under tremendous pressure. Technological change is making

factories and offices far more efficient. The rise of low-wage manufacturing in China and low-wage services in India is moving jobs overseas. The only durable strength we have the onlyone that can withstand these gale winds is innovation.

Even more troubling, there are growing signs that the U.S. no longer has the commanding lead itonce did in this area. Two reports from the Boston Consulting Group and the InformationTechnology & Innovation Foundation (ITIF) that use hard measures such as spending onresearch, patents and venture funding as opposed to surveys find that the U.S. ranks not No. 1but No. 8 and No. 6, respectively. In fact, the ITIF rankings have a category that measures howmuch a country has improved its innovation capacity from 1999 to 2009, factoring in measureslike government funding for basic research, education and corporate-tax policies.

Of the 40 countries analyzed, the U.S. came in dead last.

What is innovation?

We don't really have universal agreement on the concept, but we sure know it when we see it.This much is clear: it encompasses more than just scientific or technological breakthroughs, asbecomes apparent when you look at which companies are considered the most innovative. In theworld of business rankings, it is very rare for a company to rank first in every survey, since thecriteria often vary greatly. Yet when tackling innovation, one company, Apple, utterly dominatesthe lists, whatever the sources. So how would one define Apple's innovations? It is not a

company that focuses on pathbreaking science and spews out new inventions and patents. The2010 Booz & Co. ranking of companies by their expenditures on research and developmentplaces Apple 81st. As a percentage of its revenue, the company spends less than half of what thetypical computer and electronics company does and a fifth of what Microsoft spends.

Apple's innovations are powerful and profound, but they are often in the realms of design,consumer use and marketing. This is hardly unusual. In fact, the application of technology inservice of a consumer need or business objective is what true innovation always has been.

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Viewed from a historical perspective, that combination at the heart of successful innovationbecomes clear. Len Baker, one of the founding fathers of the Silicon Valley venture-capitalindustry, says, "My favorite example is Isaac Merritt Singer, who invented the first commerciallysuccessful sewing machine. The real benefit to society was that he was the first person to sell towomen, because prior to this it was assumed that women couldn't operate machinery. His

company invented the installment plan and the trade-in. That's innovation. Think of eBay: eBaydidn't create new technology. It used technology and revolutionized the way people do things."This idea of innovation as a new business process is of course older than modern capitalismitself. The system of accounting called double-entry bookkeeping, invented in Renaissance Italy,was powerfully connected to the development of trade and commerce. New ideas in all kinds offields can fuel economic growth.

But while novel business ideas are crucial to innovation, so too is new technology. Eric Schmidt,the executive chairman of Google, argues that "you need both." In Google's case, he explains thatthe technological breakthrough of a new and better search program came first; only later wereideas about how to make money out of it developed by building a new model for advertising

sales. The ecosystem that encourages technological breakthroughs and their application does notdevelop in a vacuum. It requires great universities, vibrant companies that devote time andenergy to research and yes large amounts of government funding. The latter may be acontroversial topic in theory, but in practice, the rise of technology was clearly fueled bygovernment.

A multitude of technological innovations have been associated with the government, often withthe military. Forget the steam engine (developed using cannon designs and technology) and takesomething as modern as the microchip. After it was invented in 1958 by Texas Instruments, thefederal government bought virtually every microchip that firms could produce. TheBreakthrough Institute reports in a paper that "NASA bought so many microchips that

manufacturers were able to achieve huge improvements in the production process so much so,in fact, that the price of the Apollo microchip fell from $1,000 per unit to between $20 and $30per unit in the span of a couple years." And then there is DARPA, the Defense Department'sventure-capital arm, which has had an astonishing string of successes, helping fund stealthtechnology, the beginnings of the global-positioning system and, most famously, the Internet.

In the rest of the world, the role of the state is not controversial. While Americans continue todebate whether government should have any role in fostering innovation, the fastest-growingeconomies are all busy using government policy to establish commanding leads in one industryafter another. Google's Schmidt points out that "the fact of the matter is, other countries areputting a lot more money into nurturing new industries than we are, and we are not going to winunless we do something like what they're doing. South Korea is a classic example. Who wouldhave thought that South Korea could become a major iron and steel and shipbuilding country inthe world? But some 40 years ago, in their organized way, they decided those are the industriesthey were going to go after. And there is now increasing evidence that Chinese companies arebeginning to do things that are innovative often with government assistance." There are manywho believe that China's government-led innovation won't work, but at least for now, inindustries like solar panels, wind turbines and high-speed rail, China is establishing acommanding lead.

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Even those who look skeptically on direct support of specific technologies agree that basicresearch requires government funding. Ultimately, innovation cannot work without bothsignificant government support and a vibrant and dynamic private sector that allows people toexperiment, fail and try again. The U.S. remains the best place in the world to do just that, anddespite our ideological bias, the U.S. government has actually spent hundreds of billions of

dollars funding science, technology and even specific industries. The problem may be less thetheory than the practice. Whereas once we funded the development of the computer chip, nowwe dole out money to agribusiness. Like so much else in Washington, funding for innovation hasbecome less merit-based and more politicized.

Yet even if the U.S. can put together the combination of government policy and private initiativethat lets innovation bloom, it won't solve all our current problems. The U.S. is climbing out of arecession in which corporate America is doing well but unemployment remains sky-high. Thosewith capital are prospering, but the average worker faces powerful challenges. Will innovationsolve this problem? That's not an easy question to answer. Consider Apple, now the second mostvaluable company in the world by market capitalization, just after ExxonMobil. Its innovative

skills have led to rich rewards for its stockholders and managers, but if you compare it with theTaiwan-based firm Foxconn, which actually makes many of Apple's products, a crucialdifference emerges.

The companies have comparable revenues, but Apple employs about 50,000 people; Foxconn,1,000,000. And there lies the key lesson. We need innovation urgently. But if we are to get theU.S. back to work, we need perhaps even more urgently to rebuild American education, reformour training system, revive high-end manufacturing, focus on new growth industries and rebuildour infrastructure. In fact, finding new ways to do these old tasks might be the greatest and mostimportant innovation of all.

Read more: http://www.time.com/time/nation/article/0,8599,2075226,00.html#ixzz1VrdeFAuZ

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