Innovation in America - a gathering storm?

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Innovation in America
A gathering storm?

Nov 20th 2008 | NEW YORK
From The Economist print edition
Confronted by Asia’s technological rise and the financial crisis, corporate
America is losing its self-confidence. It should not

Illustration by Claudio Munoz

LISTEN to the growing cries of despair coming from some leading business
people, and you might imagine that corporate America’s competitiveness could
be the next victim of the global financial crisis. But Jeffrey Immelt, the
boss of GE, the world’s largest industrial firm, sees opportunity amid the
woe. “Companies and countries that really play offence vis--vis technology
in New York to present GE’s coming innovations in health-care technology.

With those words, he touched on a debate that has been heating up for many
that America was losing its lead in innovation to India and China. They were
particularly upset that Asian rivals had been investing with more gusto in
teaching young people mathematics and science, and in advanced scientific
research. America’s National Academy of Engineering even issued a report
last year, “Rising Above the Gathering Storm”, arguing that America’s “
economic and strategic security” was in question because of lack of
investment.

The cries are growing louder. The Council on Competitiveness, an influential
group of American company bosses, university presidents and labour leaders,
issued a terse report on the matter on November 11th and demanded that Barack
Obama “take bold action to recapture America’s competitiveness” in his
first 100 days in office. Craig Barrett, the chairman of Intel, the world’s
biggest chipmaker, has also made similar complaints of late.

And in a speech in Washington, DC, on November 18th Eric Schmidt, chief
executive of Google, an internet giant, claimed that government-funded
research done in university laboratories was “the core aspect of America’s
competitiveness”. Without a dramatic increase in investment in such
research, and in maths and science education, Americans risked becoming mere
“captive consumers” at the mercy of rising Asian powers, he argued.

Venturesome America

So does the relative decline of America as a technology powerhouse really
amount to a threat to its prosperity? Nonsense, insists Amar Bhid of
Columbia Business School. In “The Venturesome Economy”, a provocative new
book, he explains why he thinks this gloomy thesis misunderstands innovation
in several fundamental ways.

First, he argues that the obsession with the number of doctorates and
technical graduates is misplaced because the “high-level” inventions and
ideas such boffins come up with travel easily across national borders. Even
if China spends a fortune to train more scientists, it cannot prevent America
from capitalising on their inventions with better business models.

That points to his next insight, that the commercialisation, diffusion and
use of inventions is of more value to companies and societies than the
initial bright spark. America’s sophisticated marketing, distribution, sales
and customer-service systems have long given it a decisive advantage over
rivals, such as Japan in the 1980s, that began to catch up with its
technological prowess. For America to retain this sort of edge, then, what
the country needs is better MBAs, not more PhDs.

America also has another advantage: the extraordinary willingness of its
consumers to try new things. Mr Bhid insists that such “venturesome
consumption” is a vital counterpart to the country’s entrepreneurial
business culture.

Is he right? The lack of long-term data means this has become “a
quasi-theological dispute”, says Robert Litan of the Kauffman Foundation, a
charity that provided some funding for Mr Bhid’s work. But the contrarian
should not be dismissed out of hand. For a start, he is right to argue
against making a fetish of invention. Edison did not invent the light bulb
and Ford did not think up the motor car, but both came up with the
business-model innovations required to profit from those marvels.

And as GE’s Mr Immelt likes to say, his firm is not great at invention, but
it is outstanding at “turning $50m businesses into billion-dollar businesses
”. Adam Segal of the Council on Foreign Relations, a think-tank, points out
that the sensors that America’s soldiers use are no longer secret
technology, but they use them in sophisticated ways that rivals cannot copy
easily.

There is another reason to take the current “techno-nationalism”, as Mr Bhid
 calls it, with a grain of salt. Even if China and India really are surging
ahead in the number of technical graduates (and research by Vivek Wadhwa of
Harvard University casts doubt on the quality of many of those degrees),
innovation is not a zero-sum game. On the contrary, there is growing evidence
that the rise of the giant emerging economies may even help those companies
from the rich world that take a global approach to innovation.

For several years Booz & Company, a management consultancy, has compiled a
ranking, called the Global Innovation 1000, of the world’s leading firms
ranked by investment in research and development. It has shown in the past
that spending more on research has no correlation with better financial
performance. But this year’s study, recently released, found that
multinational firms that took a global approach to research outperformed
those that concentrated their research spending in their home market.

Why? “Being global and open is now necessary for innovation,” says Henry
Chesbrough of the University of California, Berkeley. Cost is only one reason
(and not usually the main one, Booz argues) to have a global research
presence. Another advantage is the ability to tap into pools of talent
abroad. But the most important advantage is the ability to listen to, and
learn from, customers in new markets.

As well as helping designers come up with products relevant to those markets,
it also allows innovation to flow the other way. Indians often share mobile
phones, notes Stephen Johnston of Nokia, so the handset-maker developed
software to allow multiple phone-books on a single handset; this idea is now
being brought to Western markets so that users can, say, separate their home
and work contacts. Similarly, GE has developed low-cost medical scanners for
Asian markets that are now being sold in other poor countries, too.

Clayton Christensen of Harvard Business School is not fully persuaded by the
arguments put forth by Mr Bhid (who happens to be a former classmate). He
thinks Chinese and Indian firms may in time “disrupt” established American
companies just as personal computers challenged mainframes, and he worries
about America’s education system. But he accepts Mr Bhid’s notion that it
is more useful to teach technical skills to managers and factory workers than
merely to crank out more theoretical scientists.

Most importantly, Mr Christensen agrees with Mr Bhid that there is no case
for protectionism. Some techno-nationalists argue, for instance, that “
American innovation” should receive preferential tax treatment or subsidies.
Such proposals make little sense given the increasingly global and open
nature of innovation. As Mr Chesbrough wryly puts it: “What’s good for
Intel may not necessarily be good for America.”