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America Risks Losing Its Status As the Most Innovative Place on Earth
Technology Briefing |
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TranscriptAs explained in the August 2024 Trends issue, North America holds a totally dominant position in all ten of the crucial Deep-Tech sectors ranging from Artificial Intelligence to Biotechnology. Unlike our leadership in energy or agriculture, this dominant position is not a byproduct of geography. It’s all about innovation! And America’s one-of-a-kind multi-dimensional “innovation model” makes this possible because it encompasses the entire value chain involving talent, institutions, basic research, intellectual property, and business models. No other large economy has anything similar. How did we get here? Innovation was intentionally hardwired into the postwar American consensus. Between 1947 and 1950, the Truman Administration and Congress, in a series of decisions, adopted one of the most consequential policy objectives in history: to make the United States into the world’s unrivaled science superpower. The model the United States adopted after World War II – which drew from the landmark 1945 report Science — The Endless Frontier by MIT’s Vannevar Bush, then Director of the Office of Scientific Research and Development — consisted of four components. First, Congress would fund most basic research at levels far above any other nation through agencies like the National Science Foundation (NSF), the National Institutes of Health (NIH), and NASA. Second, researchers at nonfederal universities and labs would do most of the front-line work, with federal grants awarded through merit-based peer review processes — with little interference from politicians or bureaucrats. Third, grantees could follow their work wherever “the science” led them, with no censorship from government or university authorities. Fourth, Congress created the world’s best environment for turning discoveries into world-changing products by not just allowing but encouraging innovators to claim patents over their inventions, including those developed through work funded partly by federal grants. That framework gave rise to a division of labor that’s now so familiar that few people realize how remarkable this innovation was at the time. University scientists generally specialize in basic science — exploring the structures of the physical, chemical, and biological world — while sometimes developing product prototypes. Meanwhile, private sector firms license these ideas and bring commercial products based on them to market. Today, university scientists in the United States conduct approximately half of all basic (as opposed to applied) research, with a majority of it funded by federal grants. Business R&D frequently depends on this research. One study by leading intellectual property experts showed that more than 73% of papers cited in private sector patents during a period in the 1990s originated from research at universities. And today, innovation is becoming even more dependent on university research as private industry’s engagement with basic science recedes due to the decline of once-great research centers like Bell Labs and Xerox PARC. In short, America’s postwar R&D model has been a resounding success! According to one global ranking, U.S. universities constitute 46 of the top 100 research institutions in the world. More importantly, they represent eight of the world’s top 10 research institutions based on the quality of their patenting activity. Furthermore, U.S.-based scientists account for 30% of citations in top-tier scientific journals, according to 2022 data from the NSF. That compares with 20% for Chinese researchers and just 21% for all of Europe. The U.S. model has succeeded because, more than anywhere else, it harnesses the power of public sector resources as well as private sector enterprise. Why? Because the U.S. commitment to world-leading federal R&D investment is based on the understanding that scientific knowledge is a key public good. Without critical public sector resources, private firms would likely underinvest in R&D, since they’re unlikely to reap all the benefits generated by scientific advances. The United States’ competitive, lightly regulated research and commercialization model combined with its wide-open market for new ideas creates strong incentives to innovate. These incentives help explain why America’s IT and biotech sectors far outperform their peers in Europe, where a larger share of researchers work for government agencies, and thus lack a profit motive. The U.S. R&D model has allowed the country to develop dominant market positions in countless pioneering industries including semiconductors, software, defense, space, natural gas extraction, wind-based energy, biotechnology, and more. Most recently, the U.S. model of publicly funded university research feeding into private sector initiatives created the mRNA-based COVID-19 vaccine almost overnight. The U.S. model also undergirds the country’s lead in AI technology — contrary to popular narratives claiming that university research has played little role in this emerging industry. In fact, AI innovation is following a trajectory similar to other breakthrough technologies. As the journalist Cade Metz recounts in his book Genius Makers, researchers at New York University, the University of Toronto, and other institutions did the foundational work that made today’s large language models possible. This paved the way for companies like OpenAI, Meta, and Google which developed commercial applications based on that research. The pivotal role played by R&D leadership in powering US economic growth reflects a core truth about innovation: ideas travel best at short distance. As studies by the Stanford University economist Nicholas Bloom and other researchers have shown, successful knowledge transfers from universities to the business sector disproportionately occur close to where the technology is invented. In other words, companies tend to invest in ideas emerging close to home. One reason for this phenomenon is that innovation often results from intense exchanges of ideas among researchers, which work best through face-to-face interactions. The close connection between R&D and prosperity is particularly evident in U.S. cities. A new report from the George W. Bush Institute and the SMU Economic Growth Initiative shows that metropolitan areas with high concentrations of university R&D far outperform most other U.S. metros in business R&D spending, education levels, and incomes. On average, this benefits everyone, including people who don’t have a college degree. That means investing in research universities across the country and their nearby surrounding innovation ecosystems is a vital component of renewing America’s leadership in science and technology as well as reinvigorating distressed regions of the nation. Countries that underperform the United States in science are invariably much less wealthy as well. Some countries — notably China — have reached middle-income status by imitating or stealing technology developed in more advanced economies, but no nation has ever caught up with the world’s wealthiest societies by using this strategy. Countries that have been successful in entering the ranks of the world’s advanced economies in recent decades — like South Korea, Taiwan, and Israel — have moved beyond imitation to cutting-edge homegrown innovation in fields like semiconductors, network technology, and cybersecurity. U.S. technological dominance is also the foundation of U.S. geopolitical leadership, first because it has generated a consistent edge in defense technologies like unmanned military aircraft, quantum cryptography, and antimissile systems; as well as because it ensures the prosperity on which the United States’ ability to project power depends. Despite this glittering record, the United States now risks weakening its leadership in innovation — or losing it altogether — as a result of three self-inflicted problems. First among these problems is a weakening commitment to basic science. Federal R&D funding as a share of GDP has fallen from a high of 1.86% in 1964 to 0.71% in 2023. One key reason for this decline is that federal spending on Social Security and Medicare, plus interest on the national debt, is crowding out vital investments in science. According to World Bank data, the United States is no longer the R&D leader. Economywide, private sector research & development plus federal public sector spending now totals just 2.7% of GDP in the U.S., compared with 4.3% in South Korea, 4.1% in Israel, 3.6% in Japan, 2.9% in Germany, and 2.1% in China. The CHIPS and Science Act of 2022 offered a chance to reverse the slide in science investment, but Congress declined to take up the opportunity. Individual members proposed a doubling of the NSF budget by 2028 from the 2022 level, but both parties agreed to delete this provision from the relevant appropriations bill, citing higher spending priorities elsewhere in the federal budget. Consequently, the CHIPS legislation will direct more than $50 billion to manufacturing subsidies for favored industries — notably semiconductors and green technologies; however, it will provide virtually no bump to scientific research. To make matters worse, the Biden Administration’s 2024 budget submission would reduce science investment relative to the current year. A second challenge facing U.S. leadership in science is that academic research — in general and around the world — is becoming ever narrower and more focused on reconfirming existing knowledge rather than seeking transformational breakthroughs. According to L. Rafael Reif, an electrical engineer and the former President of MIT, “The entire innovation ecosystem is becoming more shortsighted and cautious.” In a 2023 study published in Nature, Michael Park (an ecologist at the University of Minnesota) and his colleagues studied 25 million academic papers published between 1945 and 2010 and 3.9 million patents issued from 1976 to 2010. They found that the share of “disruptive” papers and patents which transformed scientific understanding and laid the foundation for world-changing innovation had declined considerably over that period. Falling rates of disruptiveness aren’t due to a scarcity in low-hanging fruit, the authors argue. The problem, they suggest, is that academic incentives now encourage narrow, incremental research. For example, critics charge that sclerotic academic departments often encourage promising young researchers to play it safe and stick to low-risk projects before getting tenure, diluting their potential contributions during what can potentially be the most productive time in a scientist’s career. To make matters worse, the federal peer review process has reinforced this trend by becoming less supportive of high-risk proposals, according to the physicist James Langer. The third and most existential problem facing the United States today is a growing turn against free inquiry and scientific objectivity at many of the country’s premier universities. More and more areas of biology and other fields are becoming off-limits in academic departments and professional journals, according to high-profile scientists from Harvard Medical School and the University of Chicago. For instance, pursuing biology projects that might produce results inconsistent with reigning theories on gender, race, and social injustice, has become an increasingly fraught undertaking. Journal editors are lowering scientific standards for papers that support reigning ideological propositions. And administrators at University of Pennsylvania’s Perelman School of Medicine, to cite one example, are currently working to reduce the amount of science in the medical curriculum to make room for ideologically driven content, one former associate dean alleged in 2023. These trends have already had measurable consequences. In 2010, 39% of citations in top-tier journals could be attributed to U.S.-based researchers. But by 2022, only 30% of the research in these most prestigious journals came out of the United States. Meanwhile, NSF data shows China’s share rose from 12% in 2010 to 20% in 2022. Furthermore, underinvestment in R&D has almost certainly played a large role in the slowing of U.S. productivity growth since the 1970s, many studies show. This also helps explain why the United States is losing its advantage over China in military technology, according to analyses by the RAND Corporation and Sweden’s Defense Research Agency. What’s the bottom line? The magic formula for U.S. innovation leadership begins with abundant Federal funding of basic research at universities. The resulting discoveries are then shared via publication or licensed by corporations which integrate the breakthroughs into commercial products competing for profits in the real world. Eco-systems in places like Silicon Valley combine financial, human, and intellectual capital to turbo-charge this process. From semiconductors to software to biotechnology, this has made the United States the undisputed leader across almost every leading-edge sector. The resulting value creation has enabled American government, universities, companies, and consumers to establish a virtuous cycle of growth enabled by accelerating innovation. Unfortunately, this virtuous cycle has been undermined in recent years as government, universities and corporations have failed to maintain their portions of the process. As a result, twenty-first century Americans risk losing the “innovation advantage” that enabled our extraordinary affluence and national security. But fortunately, decision makers are becoming aware of the problem and have an opportunity to act. Given this trend, we offer the following forecasts for your consideration. First, alarmed by foreign threats Congress will commit to increased funding of basic and applied new research at universities and national laboratories, as soon as 2026. As the First Economic World War against Russia, China, and the so-called Axis of Evil, reaches its peak, the clearest path to victory is using technology to create entirely new competitive advantages. As with World War II, war-related innovations will be transformed into new civilian industries. Some of the best opportunities will be found in biotech, robotics, aerospace, and materials. DARPA will be a primary vehicle for making this value transfer happen. Second, under pressure from business and government, universities will eliminate woke priorities in the second half of the 2020s. Laws eliminating overt DEI and ESG influence will dramatically improve performance across the economy, especially in areas where free inquiry and genuine merit are key. This will be especially important for basic research. Mechanisms for achieving this objective are laid out in trend #3 this month. The result will be a wave of truly innovative discoveries which will enhance our understanding of the universe and positively impact economic competitiveness. Third, a big portion of the increased R&D funding will show up in DoD, NIH, and Department of Energy budgets. Some of the most obviously game-changing opportunities include: small-scale molten salt nuclear fission reactors, safe cancer treatments using enhanced immunotherapy, directed energy weapons including missile defense applications, quantum cryptography, and super-resilient high-productivity food crops. Foundational research for these and many other transformational breakthroughs already exists. We simply need to provide the incremental resources and incentives needed to deliver the benefits. Fourth, analytic AI will enhance R&D efficiency by eliminating human bottlenecks. In many fields, overwhelming complexity and limited research talent has stifled progress. Fortunately, combining AI with robotic laboratories multiplies a researcher’s abilities and vastly expands the number of alternatives he can explore. This will dramatically increase the ROI of available R&D investments while leveraging U.S. advantages. Fifth, the productivity of U.S.-based R&D eco-systems will increase as North American reindustrialization brings research, development, manufacturing and marketing into closer physical proximity. Research shows that technology clusters have a genuine competitive advantage in terms of discovery and commercialization. Globalization has undermined this advantage over the past three decades; but it’s already in the process of being revived. And, Sixth, China and Europe will fall further behind as the U.S. restores its innovation leadership. As cited in prior Trends issues, China and Europe are structurally and culturally disadvantaged for preeminence in 21st century innovation for at least four reasons.
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