Prime The Innovation System

To secure the economic and geopolitical advantage in the twenty-first century, the United States needs a technology strategy that reflects new realities, learns from the past, and is committed for the long term.

The United States has long been the global leader in advanced technology. But accelerating global competition — especially from China — and a diminished U.S. ability to invent, produce, and refine new high-tech products means that we cannot take this position for granted.

Recognizing that an effective innovation system is a strategic priority, Congress in 2022 passed bipartisan legislation including the CHIPS and Science Act to renew the nation’s infrastructure, reshore advanced manufacturing networks, and accelerate the commercialization of green and emerging technologies.

These measures are a continuation of a long and effective tradition of U.S. policies and partnerships to support science, technology, and innovation.

In forging the innovation system for the twenty-first century, policymakers need to make sure that they apply the positive lessons from the past. Importantly, these include sustained policy commitment followed by significant public support for the development of new technologies.

Government Role in the Innovation System

“Government has played an important role in the technology development and transfer in almost every U.S. industry that has become competitive on a global scale.”

Vernon Ruttan, Technology Growth and Development

The foundations of the American innovation system can be found in the U.S. Constitution, which calls for patents to “promote the Progress of Science and useful Arts.” Patents turn ideas into property that their owners can further develop in cooperation with others. To further promote coordination and interoperability, the Constitution also gives Congress the power to “fix the standard of weight and measurement.”

Throughout its history, the United States has developed successful industrial policies to respond to national needs and new global realities.

In the modern context, industrial policy refers to active government support for the development of technologies that are deemed strategically important. This support has also taken the form of broader government investments in research and education followed by procurement. One recent successful U.S. industrial policy is the Trump administration’s effort to develop and produce vaccines during the coronavirus pandemic.

Some orthodox economists deride industrial policies, seeing them as aid to businesses unable to successfully compete. In some cases, efforts to support ailing firms have failed. But in many of these cases, their inability to compete is rooted in the policies and market protection of other nations, or is simply the result of ineffective management. The Obama administration’s effort to resuscitate General Motors and Chrysler is one example where changes in management and re-capitalization proved hugely successful.

Roots of Innovation Policy

American industrial policy has a strong track record of supporting innovation and enabling new technologies through long-term policy continuity and support. This strategy has been successful. Indeed, many of these technologies have fundamentally transformed the U.S. economy.

Foundations of Innovation

The earliest call for a U.S. industrial policy dates back to shortly after the nation’s founding. In 1791, Alexander Hamilton, the first secretary of the treasury, approached Congress with his Report on the Subject of Manufactures. Breaking with those who thought the United States should remain an agricultural nation, the report outlined a strategy to develop manufacturing. Its goals were to reduce dependency on Britain and ultimately build the material base for an independent national defense.

Since then, Hamilton’s call has been realized in an effective and evolving U.S. industrial policy. Throughout its history, the United States has used these policies to spur important innovations that have enhanced its security and technological leadership.

The Postwar Strategy

The pace of technological change picked up in the years following World War II. At that time, the U.S. manufacturing base was robust, having geared up for war production and postwar reconstruction.

But, as President Truman’s advisor Vannevar Bush pointed out at the time, the nation’s research base needed to be strengthened. To address this need, the U.S. government invested heavily in basic research, including through the creation of the National Science Foundation and the expansion of the National Laboratory system. It also actively recruited leading scientists and engineers from Europe.

This strategy contributed to new technological innovations that helped win the Cold War. Moreover, the new information and communications technologies generated by this strategy transformed the U.S. economy and underpin its economic leadership today.

Capitalizing on U.S. Research

In the 1970s and 80s, Japan emerged as a major competitor in technology development and manufacturing. In response, new U.S. policies sought to more efficiently connect the research advances made at U.S. universities into development and commercialization of new competitive products by the private sector.

Together, these public-private partnerships promote cooperation across the innovation system. Widely seen as best practices in innovation policy, many have been adapted around the world. For example, countries as diverse as India and the United Kingdom have adopted or adapted Small Business Innovation Research (SBIR) in an attempt to engage innovative small businesses more effectively in their national economies.

An Ecosystem Approach to Innovation

Throughout this postwar period, U.S. innovation strategy has relied on a relatively simple linear model of innovation.

This model concentrated on public funding of basic research at the front end. From there, private actors would take the lead in applying that research to new products and bringing them to the market.

Through the years, our understanding of the innovation process has advanced. Instead of a linear process, innovation is now understood as an “ecosystem” in which various networks each play a role in developing new technologies and bringing them to market. For innovation to move at its full potential, each of these networks need to operate individually as well as connect with the other networks through partnerships across the innovation ecosystem.

1. Research Networks

   American universities, research institutes, and national labs are rich sources of new ideas and concepts.

2. Financial Networks

   Banks, venture capital funds, and other sources of capital provide the wherewithal for entrepreneurs to fund and develop these concepts into products and services for the market.

3. Entrepreneurial Networks

   Start-ups, innovative firms, and small and medium manufacturers are key actors in the innovation system, drawing on new ideas, seeking funding, and driving innovation to the marketplace.

4. Educational and Training Networks

   Universities, colleges, and vocational institutes provide the skills and workforce needed by industry to scale up and produce new products and services.

5. Manufacturing and Distribution Networks

   Firms that make innovative products and services and find and develop markets are an integral part of the innovation system. R&D and manufacturing are tightly intertwined — it is often not possible to design a product without understanding how it could be manufactured. Feedback from manufacturers and markets provides important feedback and financial returns for other stakeholders within the innovation system.

A Complete Ecosystem

A healthy innovation ecosystem contains strong, dynamic, and distributed networks, with effective connections across networks. These make the system more resilient, more adaptive, and more capable of making use of the knowledge within the system — especially when compared to more planned systems. American traditions in individual initiative and entrepreneurship, combined with what Alexis de Tocqueville called “the spirit of association,” give the United States an innate advantage in building these innovation networks.

Today’s Challenges

Emerging challenges have the potential to disrupt the United States’ innovation system. Understanding these challenges will be key to restoring U.S. leadership in innovation.

The Loss of Manufacturing

Over the past few decades, U.S. companies embraced outsourcing to capitalize on lower wages in Mexico and especially East Asia with the goal of lowering costs and increasing short-term shareholder returns. This has degraded U.S. manufacturing capabilities.

Without a strong domestic manufacturing network, which is a close complement to research and commercialization activities, the entire domestic innovation system becomes less effective. For example, the drive by U.S. firms to offshore manufacturing of display screens to East Asia, combined with South Korea’s strategic investments in its domestic R&D and manufacturing systems, led to the loss of the U.S. display industry to South Korea.

The China Challenge

China has implemented a focused strategy to become a manufacturing powerhouse and innovation leader. It has massively increased its spending on R&D — now second only to the United States — and importantly, much more of its R&D budget is focused on applied rather than basic research.

In addition, China is pursuing determined policies to ensure its dominance in artificial intelligence, advanced manufacturing, and quantum computing. It is especially focused on advanced semiconductor manufacturing, which the Chinese government correctly sees as a critical enabling technology for both civilian and military applications. China’s goal is to create a world-class high-tech manufacturing sector that is not reliant on inputs from other countries, and ultimately to make other countries dependent on its outputs.

Meeting the Challenges

Being a global hub for innovation has conferred innumerable geopolitical and commercial benefits for the United States over the last century. But without a concerted effort to match its innovation policy to the challenges of today, the United States will not enjoy those same benefits in the century to come. And it risks ceding them to geopolitical rivals with different visions of global order.

To maintain its lead in innovation, the United States has to invest in and maintain the ecosystem supporting R&D, workforce development, and the manufacture of new products and services for the global market. Fortunately, the Biden administration has passed several important pieces of legislation recommitting to U.S. leadership in the twenty-first century, though much of the resources are yet to be committed to those efforts.

While these efforts are promising initial steps to prime American innovation, sustained follow-through is needed. As a start, Congress now needs to make good on the important initiatives it has recently passed and appropriate the funds to sustain and grow a competitive economy for the twenty-first century. The money appropriated (actual dollars released) for innovation initiatives in the CHIPS and Science Act has so far fallen far short of the amounts authorized (dollars promised). This represents a concerning trend that could cause these programs to underperform their potential.

Renewing American Innovation

In an era when allies and rivals are making major investments to capture leading positions in powerful new technologies, the United States needs to upgrade its own policy structures and make large and sustained investments in R&D and in its industrial infrastructure, building out the innovation ecosystem.

The United States has set the global standard for fostering innovation multiple times in its history, and there is every reason to believe that it is capable of doing so again. But doing so will require both effective long-term planning and the financial commitments to realizing those plans. The future of the global order, and the United States’ leading role in it, depends on the success of these efforts.

Sujai Shivakumar is the Director and Senior Fellow, Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS).