The four players driving innovation

Article Highlights

  • The key to robust economic growth is innovation. How do we get it?

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  • CHART: placing burdens on corporations is a losing proposition

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  • Key drivers of innovation: Small business and startups

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The Four Players Driving Innovation

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Policymakers at both ends of Pennsylvania Avenue want to get the American economy growing again. Growth can lower unemployment, and it can yield the revenues needed to fill federal coffers. The key to robust economic growth is innovation. So how do we get it?

It helps to think about the broader ecosystem within which innovation takes place, in particular four players that influence the level and extent of national innovation: established companies, new firms, the federal government, and American consumers. Let's take each of these in turn.

1) Given the right incentives, big established firms are innovators in their own right. Think of Wal-Mart's advances in inventory management or new technologies emerging from the laboratories of 3M and Microsoft Research.

Moreover, large companies are the entities in an economy that purchase lots of new technology, thus providing other innovators with a welcome market for their goods.

If we want more innovation from big companies, and for these established companies to utilize new innovations, we should bring a measure of sanity to the corporate tax code. The United States has among the highest corporate tax rates of any Organisation for Economic Co-operation and Development (OECD) nation.

Indeed, as the chart below demonstrates, the rest of the developed world has concluded that placing excessive burdens on corporations is a losing proposition. Other OECD nations have been slashing their corporate tax rates over the last few decades, leaving the U.S. behind.

schulz-oct2011-chart-1-500

Reasonable people can differ on the appropriate rate of taxation. Nevertheless, everyone should be able to agree that a nation hoping to lead in innovation should not maintain among the world's highest corporate tax rates. We should aim for lowering it at least to the OECD average and ultimately well below that rate.

The corporate tax is especially troubling since, as my colleagues at the American Enterprise Institute, Aparna Mathur and Matthew Jensen, recently pointed out in a review of the economic literature, "labor bears a significant portion of the corporate tax burden." So at a time when middle class and working class Americans are hurting, this is a good opportunity to think about reforming our corporate tax regime.

2) Small companies and start-ups are also key drivers of innovation. Smaller firms often have greater flexibility to try new methods and techniques of doing business than their larger counterparts. They have greater room to think far outside the box.

schulz-oct2011-chart-2

Unfortunately, some data suggest that the environment for new firms is less than ideal today. A recent study by the Kauffman Foundation found that America's new companies are generating far fewer jobs than in years past.

One idea to help the investment climate for small firm entrepreneurs is to apply some common-sense reforms to the patent system. As with corporate taxes, patent law is an area where reasonable people can disagree over potential changes. Yet, all participants can agree that the Patent and Trademark Office should be adequately funded.

In recent years, Congress has starved the Office of needed funds. The result is a long patent backlog, one that makes it hard for small, innovative firms to attract capital and grow. The chart below details how the average wait time to receive a patent has been climbing steadily for two decades. This delay has been especially problematic for innovative biotech, device, and life sciences companies who need strong, clear IP protections to innovate and grow. There is never a good time for slowing down the innovation process in health care. As the Baby Boom generation heads toward retirement, we need rapid innovation in health care technology. Unless we address the patent backlog, we are less likely to get the innovation we need.

"If we want more innovation from big companies, and for these established companies to utilize new innovations, we should bring a measure of sanity to the corporate tax code."--Nick Schulz

Another idea to boost the innovation cycle is to welcome high-skilled immigrants who might start new businesses on American soil and hire American workers. One worthy idea is to provide so-called "entrepreneurs' visas" to men and women with degrees and aptitude in science, technology, engineering, and math.

3) The federal government has a role to play in encouraging innovation. All long-run innovation is built upon a stock of basic science and technical knowledge that grows over time, as well as a system of infrastructure that encourages commerce and trade. The role for government is to subsidize and encourage basic, original research that adds to this stock of knowledge and to ensure a world-class infrastructure.

A larger stock of knowledge is critical as it gives the private sector a larger sandbox in which to experiment and try new things. This experimentation process in the private sector leads to innovations both large and small that drive long-run growth.

Meanwhile, a world-class infrastructure makes economic dynamism practical and efficient, thus encouraging the risk-taking and commercial exchange that leads to new innovation.

It is true that the federal government does not have infinite resources to spend and so must prioritize its allocation of dollars. Given their positive spillover effects, however, it makes sense that funds for basic research and infrastructure should be not just by maintained, but enhanced.

Even when government resources are constrained, there are viable options for meeting the nation's needs. Harvard University's Richard Zeckhauser has been promoting the idea of "collaborative governance," whereby the government pursues a public mission by engaging private sector actors. The restoration of Central Park in New York City, where the private sector took the lead role in restoring a national public treasure, is a good example of collaborative governance in action.

The infrastructure needs of the country are not going away, so policymakers should explore a collaborative governance model when appropriate. Private sector participants would have much to gain from this approach, and so would the public.

4) Lastly, America is blessed with ample numbers of what economist Amar Bhide calls "venturesome consumers." These are individuals and firms both large and small willing to try new innovations as soon as they come to market, without perfect knowledge of their ultimate utility or effects. These venturesome consumers round out the innovative ecosystem, making the American market a great place to develop new goods and services. They deserve our thanks and encouragement.

As policymakers in Washington and in state capitals try to get the American jobs machine humming again, it is important that they take a moment to think of the bigger picture outlined here. Rapid innovation is more likely to happen when the country's business culture is right-when large firms, small firms, government, and consumers are all armed with the incentives, capacity, and confidence to experiment, take risks, and grow.

America has been blessed historically with a rich culture of innovation. Yet, all cultures need renewal and reaffirmation or else they decay and weaken. In this time of uncertainty about the future, America's businessmen, entrepreneurs, and innovators must once again reassert their role as the drivers of American innovation and prosperity.

Nick Schulz is editor-in-chief of American.com and the DeWitt Wallace fellow at AEI

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