Winning in the New Innovation-Based Global Economy:

Is Boosting the Supply Side Enough?

Presentation at the 2006 Accelerating Innovation ConferenceWashington, DC

Dr. Robert Atkinson

PresidentInformation Technology and Innovation

Foundation

The Information Technology and Innovation Foundation

ITIF is a non-partisan public policy think tank committed to articulating and advancing a pro-innovation and public policy agenda internationally, in Washington and in the states. Recognizing the vital role of technology in ensuring American prosperity, ITIF focus exclusively on innovation, productivity, and digital economy issues.

Waves of Innovation Drive Cycles of Growth & Change

Robert D. Atkinson

The Past and Future of America’s Economy: Long Waves of Innovation that Power Cycles of Growth

(Northampton, MA: Edward Elgar, 2005)

1945-58 59-74 74-93 94-2000 2001-?- ??

Technology Transformations and Growth

Time

Old TechnologySystem

New TechnologySystem

Takeoff Installation Slowdown Takeoff Installation Slowdown

Periods in AmericanEconomic History

_____________________________________________Period Years_____________________________________________Mercantile/craft 1840s to 1890s

Factory-based industrial 1890s to 1940s

Corporate mass production 1940s to 1990s

Entrepreneurial, knowledge-based 1990s to – ??

0

0.5

1

1.5

2

2.5

3

3.5

1947-1973

73-81 81-89 89-95 1995-2004

Transformations Drive GrowthAnnual Change in Labor Productivity Growth

IT is the Major Engine of Growth Today

0

0.2

0.4

0.6

0.8

1

1.2

1948-73 1973-89 1989-95 1995-02

Non-IT

IT

Sources of Total Factor Productivity Growth

Source: Jorgenson, Information Technology and the American Growth Resurgence

Transformations Also Drive Regional Restructuring

R&D Performed Overseas by Majority-Owned Foreign Affiliates of U.S. Companies

(in $millions)

*2000 **2001; Source: U.S. Bureau of Economic Analysis

0

100

200

300

400

500

600

700

800

900

Malaysia Mexico* Singapore Ireland** China Israel

19942003

Industry R&D as a Share of GDP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Change in R&D/GDP Ratio, 1991-2003

Source: OECD

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

U.S.

Canad

aChin

a

German

y

Irelan

dIsr

eal

Korea

Japa

nSpa

in

Sweden

U.S. Trade Balance in High-Tech Products

Source: U.S. Census Bureau Foreign Trade Statistics, U.S. International Trade in Goods and Services.

-40,000-30,000-20,000-10,000

010,00020,00030,00040,00050,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

0

10

20

30

40

50

60

70

80

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

High-technology Medium-high-technology Medium-low-technology Low-technology

Chinese Trade by Chinese Trade by Technological IntensityTechnological Intensity

Source: Andrew Wyckoff, OECD.

Why Does Innovation and Competitiveness Matter?

Economic growth comes from either boosting productivity in all sectors or shifting to higher-value added sectors.

In the twenty-first-century global economy, nations can no longer be indifferent to the industrial and value added mix of their economy.

Which Future For America?

Renewal Through Innovation

New England

0.9

0.95

1

1.05

1.1

1.15

1.2

1.25

1969

197

1

1973

1975

1977

1979

198

1

1983

1985

1987

198

9

199

1

1993

199

5

1997

1999

200

1

200

3

Relative Decline?

Great Lakes

0.94

0.96

0.98

1

1.02

1.04

1.06

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

So, What Should We Do?

• One side says, “Not much, everything is fine.”

• Another side says rightly, “We need to act now.”

So, What Should We Do?

Boost the Supply ofInnovation Production

Factors (e.g., scientists, basic research)

Boost the demand fromcompanies for innovating

in the United States.

We Need to Act Now

Why Is So Much of the Policy Focus on Supply-Side Factors?• According to the conventional neo-

classical economics’ view, firms compete, nations do not.

• According to this view, the task is to ensure that factors of production are mobile and quickly redeployed in case of firm failure. When you lose, it the job is to quickly reuse it.

While Some Companies Compete Internationally, All Countries Do

• Workers have context-specific knowledge whose value declines significantly when the context is lost.

• Significant spillovers from firm activities and significant first-mover advantages, including learning effects, which let firms translate early leads into dominant positions.

• There are also significant network effects that mean that advancement in one industry (e.g., broadband telecommunications) can lead to advancement in a host of others (e.g., Internet video).

• If you lose it, you can’t easily reuse it.

Outlines of a Comprehensive Innovation and Competitiveness Strategy

1. Don’t ignore the demand side (e.g., research funding, skills, STEM workforce).

3. But also create incentives for organizations to invest in innovation and innovation-based production in the United States (e.g., knowledge tax credit, health care restructuring).

U.S. Rank in R&D Tax Credit Generosity Has Fallen Significantly

1

7

17

0 5 10 15 20

1990

1996

2004

Rank

Outlines of a Comprehensive Innovation and Competitiveness Strategy

1. Don’t ignore the demand side (e.g., research funding, skills, STEM workforce)

3. Create incentives for organizations to invest in innovation and innovation-based production in the United States (e.g., knowledge tax credit, health care restructuring).

5. Fight foreign technology mercantilism.

www.innovationpolicy.org