Can America Invent Its Way Back?

"Innovation economics" shows how smart ideas can turn into jobs and growth—and keep the U.S. competitive

By Michael Mandel

Browse Issues

Browse the BusinessWeek Archive

Related Items

• Podcast: Behind the Cover

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

Watch the Video…

Will 2009 be the year of innovation economics?

Pessimism about America's future is growing. People worry about the long-term impact of the housing crisis, global competition, and expensive energy. And the policy solutions offered by Republicans and Democrats—mainly tax cuts and government spending programs—seem insufficient.

Yet beneath the gloom, economists and business leaders across the political spectrum are slowly coming to an agreement: Innovation is the best—and maybe the only—way the U.S. can get out of its economic hole. New products, services, and ways of doing business can create enough growth to enable Americans to prosper over the long run.

Certainly the Presidential candidates are taking the idea seriously. John McCain has proposed a $300 million prize for the person or company that creates a better battery technology to power cars. Barack Obama has called for spending $150 billion over the next 10 years on clean-energy technologies. The hoped-for outcome: more jobs, more competitive trade, less dependence on foreign oil.

But here's the conundrum: If money alone were enough to guarantee successful innovation, the U.S. would be in much better shape than it is today. Since 2000, the nation's public and private sectors have poured almost $5 trillion into research and development and higher education, the key contributors to innovation. Nevertheless, employment in most technologically advanced industries has stagnated or even fallen. The number of domestic jobs in the computer and electronics sector continues to plunge while pharmaceutical and biotech companies lay off as many workers as they hire. And even the industry category that includes Google (GOOG)—Internet publishing and Web search portals—has added only 15,000 jobs since 2003.

The new field of innovation economics addresses this gap between spending and results. Economists are increasingly studying what drives successful innovation to learn how companies can get more bang from the bucks spent on R&D and higher education. At the same time, they're collecting new data on American R&D initiatives to understand what's working in the U.S. and what's not. And most important, economists are making concrete proposals about how to turn smart ideas into jobs and growth.

DISAPPOINTING BIOTECH AND NANOTECH

This focus on innovation as a crucial way to develop a competitive edge is a big change from the past. While a handful of economists have studied technological change, the main focus of policy-minded economists has, until recently, been on traditional topics such as taxes, government spending, and trade.

Now some of the brightest minds in the field, including Daron Acemoglu of Massachusetts Institute of Technology, winner of the 2005 John Bates Clark Medal for the top economist under 40, are paying a lot more attention. His work examines how government and business decisions such as outsourcing can influence the direction of technological change.

But theorizing isn't enough without good data. That's why government statisticians such as Lynda Carlson of the National Science Foundation are trying to find new ways to quantify innovation and its impacts on business. In January the NSF will launch an annual survey of 40,000 companies asking how much they spend on R&D in the U.S. and overseas, by type of business and country. "For the first time, we'll have a clear picture of what kind of research companies are doing globally and what benefits they are getting from their spending,"