IN Focus September 11, 2008, 5:00PM EST

Can America Invent Its Way Back?

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At the same time, economist Paul Romer, now at Stanford University, showed how spending on innovation was different from the usual sort of capital investment because the gains from new ideas and discoveries could be shared by everyone.

Today, researchers are focusing on ways to make those undertakings more efficient. "Innovation is not just exerting effort and spending money, it's problem-solving," says Karim Lakhani, a professor at Harvard Business School. Lakhani has been studying what is called distributed innovation, in which solutions to a business or technical problem are solicited from a wide variety of people. Open-source software or companies like InnoCentive, which encourages outside researchers to work on corporate problems, are good examples. By contrast, most companies are unwilling to draw on outside expertise. "It's the broadcast of the problem that is important," argues Lakhani. "By publicizing a problem, we can get access to better ideas."

Lakhani is encouraged by the growing number of prizes for innovative products, such as the Progressive Automotive X prize ($10 million for a car that gets 100 mpg). However, offering more—and smaller—prizes would allow a wider range of people to take on a challenge, he argues. "We want diversity of eyeballs."

One way to attract broader attention to a problem is to conduct more R&D overseas. In part, that's because scientists and engineers in India, China, and Eastern Europe are cheaper than their American counterparts. In addition, global collaboration can improve results by bringing in more diverse perspectives.

But globalizing research and production can also alter the direction of technological change—with potentially negative effects on U.S. prosperity. MIT's Acemoglu, who holds dual American and Turkish citizenship, argues in his work that in the past U.S. companies directed their research to take advantage of the well-educated American workforce. Now, as more multinationals move operations overseas, they are developing technologies adapted for their less skilled foreign workforces. In other words, offshoring is affecting the direction of innovation in ways that are more favorable to countries such as China and India. In particular, says Acemoglu, "China is going to have a major effect on technology."

Measuring the impact of outsourcing and other factors on innovation will require far better statistics than are now available. That's why the NSF is pushing hard to collect greatly improved data on R&D and innovation, a tough task. Its new study aims to provide useful information for both businesses and policymakers, says Carlson, who helped create the government's statistics on energy consumption before she joined NSF in 2000. The survey will ask a wide range of questions, including whether companies are using their research to create new products or simply to improve existing ones. "The new statistics will provide benchmarks for companies," says Carlson, "and allow them to see how their R&D and innovation performance compares to the rest of their industry."

Even as better data are collected, the government is also upgrading the system of economic statistics it uses to produce GDP figures. The goal: to shed more light on innovation and other drivers of growth. Late this year, the Bureau of Economic Analysis plans to publish a "blueprint for innovation" showing how the government stats can better capture innovation-related expenses such as education and R&D, says BEA director J. Steve Landefeld.

ACADEMIC AND CORPORATE ALLIANCES

What kinds of policies can improve the performance of U.S. innovation? Since 2000, the Bush Administration has boosted spending on nondefense R&D by roughly 40%, after adjusting for inflation. Still, more could be done. Democrat Obama wants to double federal funding for basic research, which in real terms is up just about 20% since 2000. Both the GOPs McCain and Obama want to boost support for the development of less polluting technologies.

But a big point of innovation economics is that money alone is not enough.