Is America Losing Its Edge?

The United States' global primacy depends in large part on its ability to develop new technologies and industries faster than anyone else. For the last five decades, U.S. scientific innovation and technological entrepreneurship have ensured the country's economic prosperity and military power. It was Americans who invented and commercialized the semiconductor, the personal computer, and the Internet; other countries merely followed the U.S. lead.

Today, however, this technological edge-so long taken for granted-may be slipping, and the most serious challenge is coming from Asia. Through competitive tax policies, increased investment in research and development (R&D), and preferential policies for science and technology (S&T) personnel, Asian governments are improving the quality of their science and ensuring the exploitation of future innovations. The percentage of patents issued to and science journal articles published by scientists in China, Singapore, South Korea, and Taiwan is rising. Indian companies are quickly becoming the second-largest producers of application services in the world, developing, supplying, and managing database and other types of software for clients around the world. South Korea has rapidly eaten away at the U.S. advantage in the manufacture of computer chips and telecommunications software. And even China has made impressive gains in advanced technologies such as lasers, biotechnology, and advanced materials used in semiconductors, aerospace, and many other types of manufacturing.

Although the United States' technical dominance remains solid, the globalization of research and development is exerting considerable pressures on the American system. Indeed, as the United States is learning, globalization cuts both ways: it is both a potent catalyst of U.S. technological innovation and a significant threat to it. The United States will never be able to prevent rivals from developing new technologies; it can remain dominant only by continuing to innovate faster than everyone else. But this won't be easy; to keep its privileged position in the world, the United States must get better at fostering technological entrepreneurship at home.

PENNYWISE

At the moment, it would be premature to declare a crisis in the United States' scientific or technological competitiveness. The United States is still the envy of the world for reasons ranging from its ability to fund basic scientific research to the speed with which its companies commercialize new breakthroughs.

This year, total U.S. expenditures on R&D are expected to top $290 billion-more than twice the total for Japan, the next biggest spender. In 2002, the U.S. R&D total exceeded that of Canada, France, Germany, Italy, Japan, and the United Kingdom combined (although the United States trailed Finland, Iceland, Japan, South Korea, and Sweden in the ratio of R&D to GDP). And although scholars from other parts of the world may write relatively more science and engineering papers than Americans do, U.S. research continues to be cited the most.

The United States also leads the major global technology markets, holding commanding market shares in aerospace, scientific instruments, computers and office machinery, and communications instruments. U.S. information and communications technology producers lead almost every sector. And for the last two decades, U.S. firms have been the top providers of high-technology services, accounting for about one-third of the world's total.

These strengths, however, should not obscure the existence of new threats to the long-term health of science and innovation in the United States. A record $422 billion budget deficit, for example, may undermine future government support for R&D. Recent shifts in federal spending will leave basic research-that driven by scientific curiosity rather than specific commercial applications-underfunded, depriving the economy of the building blocks of future innovation. Although federal expenditures on R&D are expected to reach $132 billion in fiscal year 2005 and $137.5 billion in 2009, new spending will be concentrated in the fields of defense, homeland security, and the space program. Funding for all other R&D programs, meanwhile, will remain flat this year and decline in real terms over the next five years.

In July, Congress approved a record-breaking $70.3 billion for R&D for the Defense Department in 2005, a 7.1 percent increase from last year and more than the Pentagon had asked for (in fact, the department's top brass had asked to cut R&D spending). Such largesse makes it likely that the Pentagon will be able to continue innovation in the near term. Its longer-term prospects, however, are more worrying. According to five-year projections by the American Association for the Advancement of Science, the Defense Department will focus more and more on weapons development while neglecting basic and applied research.

Privately funded industrial R&D, meanwhile-which accounts for over 60 percent of the U.S. total-is also starting to slip as a result of the current economic slowdown. Private industry cut R&D spending by 1.7 percent in 2001, 4.5 percent in 2002, and 0.7 percent in 2003. This year, R&D spending is expected to increase-but by less than one percent, which is less than the inflation rate. Furthermore, with less than 10 percent of its R&D spending dedicated to basic research, industry will not be able to fill in the gaps created by the government's shift of funding to defense and homeland security-related research.

These funding decreases may be exacerbated by a coming labor shortage. The number of Americans pursuing advanced degrees in the sciences and engineering is declining, and university science and engineering programs are growing more dependent on foreign-born talent. Thirty-eight percent of the nation's scientists and engineers with doctorates were born outside the country. And of the Ph.D.'s in science and engineering awarded to foreign students in the United States from 1985 to 2000, more than half went to students from China, India, South Korea, and Taiwan.

Such dependence on foreign talent could become a critical weakness for the United States in the future, especially as foreign applications to U.S. science and engineering graduate programs decline. With booming economies and improving educational opportunities in their countries, staying at home is an increasingly attractive option for Chinese and Indian scientists. In addition, visa restrictions put in place after the terrorist attacks of September 11, 2001, have created new barriers for foreign students trying to enter the United States. Surveys conducted by the Association of American Universities, the American Council on Education, and other education groups have blamed repetitive security checks, inefficient visa-renewal processes, and a lack of transparency for significant drops in applications to U.S. graduate programs this year.

ENGINEERING BIOSYSTEMS

The real test for the United States' future will be whether it can maintain and improve its environment for innovation. For the last 30 years, U.S. companies have led in the invention of new products while Asian firms have played a secondary role, lowering the costs to manufacture U.S. inventions. But Asian firms have begun to challenge that division of labor and are no longer content simply to follow.

This shift has resulted in part from a change in the way U.S. companies work. During the 1980s and 1990s, U.S. technology producers started collaborating more with colleagues around the world. Private industry found that R&D had become too costly and risky for a single lab at a large company to undertake alone. Instead, cutting-edge companies began to cooperate with a wide network of other firms, universities, and industry-government consortia to develop new products. Such activity flourished in places such as Silicon Valley, the Route 128 corridor in Boston, and in Austin, Texas-hothouses of innovation where scientists, venture capitalists, and technology managers meet and share information. The result has been a shift in the locus of innovation from individual corporate labs to networks of technology firms, capital markets, and research universities.

Cheaper communications technologies have also allowed U.S. companies to operate more globally, dividing production into discrete functions, contracting out to producers in different countries, and transferring technological know-how to foreign partners. Contrary to conventional wisdom, not just labor-intensive manufacturing is being moved offshore; Microsoft, Intel, Bell Labs, Motorola, and other firms increasingly perform advanced research abroad.

The attraction of emerging technology clusters in places such as Shanghai, China, Bangalore, India, and Hsinchu, Taiwan, was at first based on their cheap labor supply. But as local technology companies have developed, new research institutes have been founded, and scientists and engineers from such countries have returned home after training and working in the United States, these hubs have started supporting innovation of their own. Craig Barrett of Intel has said that the Chinese are now "capable of doing any engineering, any software job, any managerial job that people in the United States are capable of." And Microsoft has reportedly contracted with the Indian companies Infosys and Satyam not only to do simple software coding, but also to provide highly skilled software architects.

No longer content to dominate labor-intensive manufacturing, Asian governments are also actively promoting technological innovation. Japan and South Korea each currently spend 3 percent of GDP on R&D (compared to 2.7 percent in the United States) and Beijing is trying to reach an R&D spending target of 1.5 percent of GDP in 2005 (up from 0.6 percent in 1996). Asian countries are also trying to take the lead in three areas that are likely to generate the next wave of innovation: biotechnology, nanotechnology, and information technology. Governments have increased their support for all three areas, and Asia now spends as much as the United States and Europe combined on nanotechnology. South Korea, China, and Japan have all established national offices to coordinate research and are spending significant private and public resources on new developments.

In addition to increasing science and R&D budgets, China, India, South Korea, and Taiwan are shifting from top-down, state-directed technology policies to more flexible, market-oriented approaches that foster innovation and entrepreneurship. Regional governments are using tax, education, and fiscal policies to create clusters of domestic start-ups. They are encouraging students, scientists, and technology managers to return from Silicon Valley to set up their own companies in Shanghai or Bangalore. And by offering tax holidays as well as priority access to water, land, and electricity, they are attracting high-tech companies from the United States, Europe, and Japan.

All of these changes in Asia highlight one of the paradoxical outcomes of globalization: geography has become both less and more important to innovation. Technology firms can now locate anywhere. Production that was once tied to a specific place can be picked up and moved to other parts of the world. But to remain competitive, technology companies need knowledge-and information-rich regions; firms are likely to be drawn to technology hubs that provide the concentration of ideas, talent, and capital needed for future innovation. Globalization has therefore not eliminated geography as a concern, but rather increased the leverage of those regions that can successfully assemble the components of innovation.

RAPID RESPONSE

Before rushing to address these challenges, Washington should understand the limits of the data used to describe S&T trends. Predictions of labor shortages in the sciences have been frequently wrong before, graduate school enrollment can change from year to year, and other data can counterbalance bad news. Although the number of Ph.D. students coming to the United States has dropped, for example, the proportion of those choosing to remain after their studies has increased substantially. Moreover, a bachelor's degree may now be more relevant to innovation than before, and the number of American students getting such degrees in science and engineering has increased over the last decade.

Policymakers should therefore be careful not to focus too much on any particular statistic. Dollars spent on R&D or research papers published are easy to measure, but innovation involves many other factors. The speed at which new technologies such as broadband are adopted and diffused, the flexibility of labor markets, and the ease with which new companies can enter and exit technology markets all affect the ability of innovators to flourish in a particular economy-yet such factors usually fall outside the parameters of traditional S&T policy.

The double-edged phenomenon of globalization, which can both strengthen U.S. technology companies and threaten the innovation system, makes the task of supporting innovation through policy much more difficult. Proximity to consumers gives firms a better sense of potential new markets and allows them to rapidly respond to changing customer demands. Yet a move overseas, although it might seem good for shareholders, could also destabilize the complex interactions between firms and universities that drive technological discovery in the United States. Removing any one element from a technology cluster can diminish its ability to generate new ideas. Send manufacturing jobs to Asia and you risk exporting important components of your innovation infrastructure.

The United States cannot and should not prevent the emergence of new technology clusters in Asia. Instead, it should prepare to develop and absorb new technologies as they emerge elsewhere. The ability to make good use of diverse ideas and systems remains one of the United States' most important comparative advantages, and U.S. companies must make sure that good ideas, no matter where they are developed, are brought to market in the United States first.

U.S. private industry may want to follow the example of the nation's armed forces. Washington's military dominance no longer depends on it denying others access to critical technologies. Many of the sensors that the U.S. military now uses to detect ships or aircraft beyond visual range or to provide targeting information are off-the-shelf items produced by companies around the world. Unable to prevent the spread of these technologies to potential enemies, the United States has maintained its military superiority by making sure it is better than any other country at using such tools, integrating sensor input, and creating sensor networks. In the commercial sphere, U.S. firms should similarly strive to maintain their advantage by adopting and integrating new technologies more rapidly than their competitors.

Maintaining such speed will require that U.S. companies have a presence in Asian markets to track, develop, and invest in the most promising new ideas. Washington must continue to pressure its trading partners-especially Beijing-to meet the terms of current trade agreements and allow such access. The United States must also promote voluntary and open technology standards. In March 2004, the Bush administration protested regulations requiring all wireless imports to China to contain data-encryption technology produced only by Chinese companies. Beijing has since withdrawn the regulations, but given China's interest in developing new technology standards, the United States should watch for future attempts of a similar nature.

At home, Washington should not strive to identify the next big thing. Rather, policymakers should ensure that the United States remains the most dynamic innovation system. Funding for science and education must be maintained. Although it might be tempting to shrink the budget deficit by reducing discretionary funding for the sciences, this would weaken one of the pillars of the country's future economic and technological health. Money for basic research, especially in the physical sciences and engineering, and support for the National Science Foundation should therefore be maintained at current levels or increased.

Of equal importance, policymakers must also reinforce the United States' entrepreneurial climate, its greatest asset. The building blocks of American innovation-flexible capital and labor markets, transparent government regulation, and a business environment that rewards risk-need to be strengthened. Making the R&D tax credit permanent and expanding it to include more types of collaborative research, for example, would help provide incentives for innovation in as many technological sectors as possible.

With innovative capacity rapidly spreading across the Pacific, the United States cannot simply assume that it will remain the epicenter of scientific research and technological innovation. Instead, it should meet the challenge from Asia head-on. The United States must actively engage with new centers of innovation and prepare itself to integrate rapidly and build on new ideas emerging in China, India, and South Korea. Above all, it must not assume that future innovation will occur automatically. Only through renewed attention to science funding, educational reform, the health of labor and capital markets, and the vitality of the business environment can the United States maintain its edge-and the most innovative economy in the world.