What if we took the world's best ideas for helping young companies and stitched them together to create a kind of Innovation Super-Nation? Maybe it would look like this...
"The first step in winning the future is encouraging American innovation," President Obama declared in his 2011 State of the Union address. He's right. But what's the pathway to "encouraging American innovation?"
Innovation is a central element in promoting national economic performance, especially for the United States, which is at the technological frontier and can't effectively adopt technology invented elsewhere to achieve growth. As Paul Romer proposed in his New Growth Theory, investing in innovation is a crucial endogenous factor - and therefore one firmly in the grasp of policymakers - that creates economic growth. Future growth depends upon our ability to make new things. Nations with the ability to innovate are better poised to nurture entrepreneurship, attract early-stage risk capital and sustain a diversified ecosystem that bolsters long-term economic growth.
Some of the answers to our innovation challenge will come from within the U.S. We remain in many ways the most dynamic country in the world, with more top universities and multinational corporations than any other nation. But it's foolish to imagine that the best innovation ideas in the world already have a home in policies coming from Washington, D.C. Here is a world-wide tour of the best ideas that our government should import to jump-start innovation.
These policies encapsulate human capital, both indigenous and from immigration. Some are aimed at enhancing research and development (R&D), such as direct government funding of R&D, R&D tax credits and corporate tax rates. Others nurture innovative small and medium firms and improve access to risk capital. I've also considered policies encouraging technology transfer and commercialization from universities and other research centers and those relating to the overall business environment.
A BETTER WAY TO INVEST IN PEOPLE
First, let's look to Singapore, which developed a set of indigenous human capital strategies that radically altered its economy. In 1960 Singapore had a per capita GDP of $2,300, roughly equal to Jamaica's. Singapore focused on becoming a financial services and research hub, while Jamaica concentrated on tourism. Fifty years later Singapore's per capita GDP was $43,100, while Jamaica's is slightly above $5,000.
The difference was investment in human capital. Singapore's education system is heavily subsidized by its Ministry of Education to ensure a meritocratic principle that identifies and nurtures bright young students for future leadership positions. In the '60s, Singapore attracted foreign capital by targeting labor-intensive manufacturing to create jobs. As its workforce became better educated through its investment strategies in the '70s, it began attracting higher value-added industries such as petrochemicals, electronics and data storage. Today, Singapore is a leader in a host of knowledge-based industries, including the biomedical sciences. In just the past decade, the number of scientists has leapt from 14,500 to 26,600, a gain of more than 80 percent. In the most recent Global Competitiveness Report put out by the World Economic Forum, Singapore ranked 1st in the quality of its math and science education.
A BETTER WAY TO TREAT IMMIGRANTS
Best practices in high-skilled immigration policy can be witnessed in Canada. The government has consistently promoted Canada as a destination for immigrants and prides itself on having a fairly open and straightforward immigration process. In 2010, Canada welcomed 280,636 immigrants while the U.S. accepted 1,042,625 -- on a per capita basis less than one-half of the Canadian figure. Under the Canadian immigration system there are three categories: economic, family reunification and refugee. The economic class is based upon a detailed points system that calculates relevant skills. Canada, with a population one-tenth that of the U.S., accepted 186,913 "economic immigrants" in 2010, accounting for 66.7 percent of its total. These immigrants unquestionably contribute to economic growth, job creation and increased demand for housing. In contrast, the U.S. currently caps employment-based visas, including those with extraordinary skills, professionals holding advanced degrees, skilled workers and professionals, special immigrants (e.g. religious workers), and investors, at 140,000, or just 13.4 percent of all immigrants.
Toronto alone absorbs approximately 100,000 immigrants per year, the vast majority high-skilled (or members of Richard Florida's Creative Class) under the economic category and has transformed its economy. In addition, Canada is home to 981,137 temporary foreign residents, the majority of whom are either foreign workers or foreign students. Temporary foreign residents can apply for permanent residency in Canada under the "experience class."
A BETTER WAY TO INVEST IN RESEARCH
Innovation, along with entrepreneurship, involves a lengthy process of research and development, one that inevitably entails risk for firms and industries. There are three main categories of risk: regulatory, innovation and monetary. My research and others' shows that lucrative reward systems and regulatory structures directly influence the level of R&D activities. Tax credits are one way to effectively reduce the risks inherent in conducting R&D.
Some readers will be surprised to learn that France has the most generous tax incentives for R&D among the OECD countries. The government is continually expanding the scope of the tax credit, and the amount of funding available nearly doubled between 2006 and 2008. A company can receive up to 50 percent of its R&D costs the first year; 40 percent is covered the second and 30 percent in the third. There is a mechanism that allows funding to be "fast-tracked" for small- and medium-size enterprises, and in most cases, the waiting period for approval is only three months. Lastly, the tax credit is either deducted from the annual corporate tax or reimbursed after three years, providing greater flexibility. The tax subsidy rate per $1 of R&D in France averages 43 cents, while in the U.S. it is a paltry 7 cents.
Finland serves as another example of using policy solutions to transform its economy from resource-based to knowledge-based through consistently increasing gross expenditure on R&D. Simultaneously it has also pursued international scientific collaboration, university/industry partnerships, and enhanced venture capital availability. On a per capita basis, Finland now claims double the OECD average of patent output.
A BETTER WAY TO THINK ABOUT TAXES
International differences in corporate income tax rates are a key factor determining where firms locate their corporate headquarters, R&D activities, and a host of other high-value functions. Today, globalization forces firms to operate a worldwide network of activities to remain competitive. Because innovation is mobile across borders, tax policies have a stronger than ever affect on where innovation assets are placed.
Switzerland's corporate tax rates are among the most attractive in the OECD. The combined federal and local corporate income tax rate in Switzerland is 21.2 percent, compared to the U.S. rate of 39.2 percent, which is the second highest after Japan. Unlike in most countries, individual Swiss states levy a larger share of corporate taxes and have a high degree of autonomy in terms of setting their own rates. Between 1998 and 2008, Switzerland attracted 180 regional headquarters of large foreign firms. In recent years the UK has lost a number of corporate headquarters to Switzerland. This has been most prevalent in financial services and the biomedical sectors. It's no accident that Switzerland ranks 1st on the INSEAD global innovation index.
FROM ISRAEL (AND GERMANY):
BETTER WAYS TO CAPITALIZE SMALL AND MEDIUM ENTERPRISES
Israel has one of the most active venture capital networks in the world. While the U.S. might lead the world in venture capital investments in absolute amounts, Israel has surpassed it relative to the size of its economy. The Yozma program (started in 1993) is often credited with initiating the VC industry in Israel. The Yozma program provided tax incentives for foreign VC investments, and the fund was used to match investments. This provided a mechanism of due-diligence for the investments; professional VCs had vetted the firms. Yozma was also used to invest in existing domestic VC funds to help support the new industry.
The objectives of the Yozma program were to: 1. Establish the critical mass for a competitive VC industry 2. Learn from foreign partners 3. Create a network of international contacts
Typically, investments were directed toward high-technology companies in fields in which Israel already had an advantage or competency. By 2000, the amount of VC invested in the country had soared.
Looking at policies that nurture small- and medium-size enterprises, an outstanding example is the German Fraunhofer system. Germany is known for its mid- to high-technology manufacturing. While the U.S. has witnessed a decline in manufacturing output as a share of GDP, Germany's has remained steady. By specializing in medium and high technology manufacturing, Germany is able support relatively high wages. The Fraunhofer Institutes in Germany are an important reason for its continued success in manufacturing. The Institutes support manufacturing SMEs by creating partnerships between businesses and universities and encouraging industrially-relevant research in advanced technology areas. The Institutes have a budget of $2.35 billion, with $2 billion of that generated through contract research or publically financed research projects. There are eighty research centers with a total staff of 18,000 qualified scientists and engineers. The expertise and partnerships created through this initiative helped sustain high technology manufacturing in Germany and resulted in a high level of market share for SMEs, fueling broad-based export growth.
FROM GREAT BRITAIN:
A BETTER WAY TO TURN IDEAS INTO COMPANIES
The United States may be a world leader in technology transfer and commercialization outcomes, but it could learn something by looking to the U.K. Universities in the U.K. are among the world's elite in scientific research. The 2011 QS World University Rankings place the University of Cambridge first, the University of Oxford fifth, Imperial College London sixth and University College London seventh. Building upon this strength, the British government has invested in Engineering and Physical Sciences Research Councils at three university research centers. Its aim is to mobilize a collaborative effort between researchers and industry to commercialize academic R&D, mostly in regenerative medicine and medical devices. The U.K. launched the Innovation Investment Fund in 2009 to support promising technology-based businesses, especially in clean tech and the life sciences. The government hopes to attract capital from the private sector and eventually create the largest technology fund in Europe, which could be worth up to $1.6 billion over its 12- to 15-year life.
FROM SOUTH KOREA:
A BETTER WAY TO SUPPORT BUSINESS
For an example of creating a business environment that is highly conducive to innovative activities and making sure they are imbedded in the economy, look to South Korea. The Korean government was quick to respond during the recent global financial crisis. The country is highly dependent on exports, and foreign trade was badly affected by the recession (initially the economy experienced a 15 percent contraction in real GDP). In response, the government instituted a number of reforms making it easier to start a business. It also cut the corporate tax rate. The time required to start a business was reduced to 7 days in 2010, down from 14 in 2008. The government created start-biz, an online system where entrepreneurs can sign up to start a business. Korea moved up to 8th on the World Bank's 2012 Doing Business report, an improvement from 15th place the prior year. Korea's real GDP growth rate in 2010 was 6.1 percent, the highest in the OECD.
This is just a small sample of best policies from around the world. Over the long term, national wealth is determined by how quickly innovations can be imbedded into a country's economy, enhancing productivity growth. If the U.S. can reformulate a group of strategies similar to those on this list, it could catapult itself to renewed preeminence in global innovation. Only visionary leadership among political, business and policy officials is required. That said, leadership seems to be in short supply in Washington, given the partisan discord. Innovation must become a top priority and is something that leaders in Washington and around the country must think about when they wake up in the morning.
Ross C. DeVol is chief research officer of the Milken Institute.