IS THE U.S. SLIPPING AS AN INNOVATOR? NEW EVIDENCE SAYS, 'DEFINITELY'

Edited by Douglas Harbrecht

For years, some economists and businesspeople have been worried that the U.S. is falling behind Japan, Germany, and other countries as the world's leader in innovation. Now comes a fresh analysis by Michael Porter of Harvard Business School that suggests the U.S. is indeed lagging behind its rivals as a place where promising ideas get turned into new products -- despite having an economy that's leading the world.

The seeds of decline outlined by Porter in a new "index of innovation" are familar: R&D spending is falling in America. So are the number of scientists and engineers engaged in R&D, and the share of U.S. gross domestic product spent on education. What's new -- and bound to spark controversy -- is Porter's attempt to link these factors directly to America's capacity to innovate. He thinks that Switzerland, Germany, and Japan will soon surpass the U.S. unless current trends are reversed.

Porter and Professor Scott Stern of MIT's Sloan School of Business presented the innovation index on Mar. 13 to some of the nation's top CEOs, political leaders, and labor officials gathered at MIT for an "Innovation Summit" convened by the Council on Competitiveness. Porter's findings, while sobering, are not altogether unwelcome by the members of the Council, which has been warning against U.S. complacency since its founding in 1986.

The index measures each country's capacity to innovate based on the number of international patents it generates. The commitment of time and money required to file patents outside the country where an idea originates makes international patents "a pretty good indicator of commercial value," says Porter. International patents are also "strongly related" to exports of goods and services, he argues.

The index, which ranks 17 countries annually from 1975 to 1996, tries to explain the differences among countries by relating their international patents to six factors:

Japan has dramatically improved its innovative capacity and output, an improvement that Porter argues is "well-explained by measures of its national environment for innovation." Germany has risen steadily, while Denmark and Finland have made major gains. Sweden and France are treading water, Porter says, and Britain "is moving from an innovator to an imitator."

The index shows America's capacity for innovation grew strongly in the 1980s and peaked around 1989, driven by strong increases in R&D spending, workers employed in science and technology, education spending, and GDP per capita.

Since 1989, however, the U.S. index has been flat or falling, and is currently below the index level for 1978, Porter says. Besides the drop in spending on R&D and education, a decline in the relative international openness of the U.S. economy has been a contributing factor, Porter argues.

Based on the trends identified by the innovation index, the U.S. stands to fall from No. 1 in 1996 to No. 3 in 1999, behind Switzerland and Germany. By 2006, current trends would place the U.S. in sixth place, with Japan at the top, followed by Denmark, Switzerland, Finland, and Germany.

While many will argue over the validity and importance of Porter's index, it leads to some general observations that may be less controversial. The results suggest that R&D undertaken by business is more productive than R&D by government. Government funding for R&D in universities and companies showed beneficial effects, but increasing the share of R&D personnel employed by governments drags down a country's innovative capacity, according to the index.

Surprisingly, one factor that does not have much of an impact on innovation, as measured by international patents, is the amount of risk capital available in a country, for instance, through venture funds. "We're scratching our heads about that one," says Porter. The implication, he says, is that innovation doesn't have to come from startups financed by venture capital, which is a mainstay of the U.S. system. Says Porter: "Other approaches in other countries work as well."

By Paul Judge in Boston