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What is a National Innovation System and Why Does it Matter?

By Robert Atkinson July 3, 2014

There is a disturbing turn to “neo-Ludditism” in America as public interest groups, the media, and the public adopt an anti-innovation attitude.

In the conventional view, innovation is something that just takes place idiosyncratically in “Silicon Valley garages” and research and development (R&D) laboratories. But in fact, innovation activities are best understood as being embedded in a broader national innovation system (NIS), which is central to innovation-based growth and the ultimate health of an economy.

And, just as innovation is more than science and technology, an innovation system is more than those elements directly related to the promotion of science and technology. Rather, it includes all economic, political, and social factors affecting innovation including: the financial system; organization of private firms; the elementary, secondary and university educational systems; labor markets; culture; regulatory policies and the strength of innovation institutions.

Innovation Success Triangle
One way to conceptually organize the factors determining innovation is to think of an innovation success triangle, with business environment factors along one side of the triangle, the trade, tax and regulatory environment along another, and the innovation policy environment along the third. Success requires correctly structuring all three sides of this triangle.

Unfortunately, when evaluating the U.S. in terms of the innovation success triangle, it is clear to see that our system is now weaker than our global competitors and declining further in several key areas. Although the U.S. had the world’s strongest national innovation system for more than half a century, today that leadership has been lost.

A key area where this decline can be seen is in decreased funding for universities and federal labs and other innovation inputs as federal policymakers continue their unwillingness to prioritize investment in the federal budget process. For example, the U.S. now ranks just 24th, out of 39 nations, in government funding of university research and development (R&D) as a share of GDP.

And while some would argue that corporate R&D is replacing government investments, the numbers indicate otherwise, business funding of university R&D is just 27th globally as a share of GDP.

Afraid of Innovation’s Shadow?
There is also a disturbing turn to “neo-Ludditism” in America as so-called “public interest” groups, the media, and an increasing share of the public adopt an anti-innovation attitude, whether it relates to genetically modified organisms, the enhanced use of data, or automation. Couple this with a growing anti-corporate animus (from the right which decries so-called “crony capitalism” and the left which lumps corporations in with the “one percent”) and it becomes harder and harder for government to take actions to affirmatively help U.S. companies innovate and compete. (Witness the current debate over the Export-Import Bank reauthorization).

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In addition, the U.S. regulatory and tax systems are increasingly becoming drags on innovation.

Many Democrats view even simple common-sense reforms as opening up the floodgates of deregulation and believe that business, especially large businesses, are regulated too lightly. At the same time, most Republicans are reluctant to increase funding for regulatory agencies, believing that this will simply empower them to regulate more, rather than regulate more smartly and expeditiously. Similarly, the federal R&D tax credit, once the most generous, now ranks just 27th. These factors raise the cost of doing business in America, reduce opportunities for additional corporate investment and are helping to drive innovation industries overseas.

There are a number of areas where there is reasonable bi-partisan consensus for policy reforms that would strengthen the American NIS and improve our global innovation competitiveness. These include:

  • Enhanced funding for STEM education
  • Improved manufacturing technology support programs (e.g., the Congressional RAMI legislation)
  • Increased funding for technical skills training, and expanded resources for trade enforcement

But to date, Congress has been preoccupied with matters other than enhancing U.S. innovation and competitiveness, and even if they did focus their attention here, the overall budget impasse (Democrats unwilling to cut entitlement spending, Republicans unwilling to raise taxes on individuals) suggests that little of substance will happen in these areas.

As nations compete to win the global innovation race, some will sprint out ahead, others will remain stuck in the middle of the pack, and still others will struggle to get out of the starting gate.

The nations that can put together all three sides of the innovation success triangle most effectively are likely to be the ones that win the race and reap the rewards in greater economic vitality and prosperity.

The challenge for the U.S. going forward is whether it can make the needed changes to its innovation system to meet the new competition. Our economic future will depend on the answer.

Robert Atkinson is President of the Information Technology and Innovation Foundation.