Keeping Up with the World: How to Kick-start Innovation for the Long Term

January 3, 2012

Adam Davidson (the always fascinating co-founder of NPR's Planet Money) attempted to kick off the new year in incendiary style by asking the following question in the pages of last Sunday's New York Times: "Will China outsmart the U.S.?"  This is an extremely apt question for the future of the United States, so Adam's conclusions are well worth noting.

While yesterday's innovation could consistent of one really profitable invention, such as the Western Electric 500 telephone, the pace of innovation is increasing around the world and the shelf life of the resulting products is decreasing.  What this means is that "these days, all successful U.S. businesses have become innovation-based companies."  As a country we have crawled and scraped our way to the top of the value chain, churning out advanced products and ideas that enjoy good margins.  This hasn't gone unnoticed by other countries, namely China.  While we have under-invested in research and development (R&D) for decades, countries like China have played catch up to great success.

The conclusion is that America needs more investment in R&D.  Yet the truth is that no amount of government investment in research can keep America competitive in the coming decades.  As Davidson points out, "any growth in long-term R. and D. will be, largely, up to the private sector." There's a wrinkle though.  "From a C.E.O.s perspective, long-term R. and D. is a lousy investment.  The projects cost lots of money and often fail.  And even when they work, some other company can come along and copy all of the best ideas [for] free." The real question then is how we can incentivize the private sector to invest in long term innovation.  Davidson has a few answers:

"The government can’t simply pass a law forcing companies to think longer-term, of course. But Congress can do other things, like shift incentives away from rampant short-termism. It could, for example, reduce capital-gains taxes on stocks held for many years. Alternately, companies could create different classes of stock, giving more voting rights to those who hold the stocks longer. Another idea popular among businesspeople: enticing foreign Ph.D. students to develop their new ideas in the U.S."

At the start of this new year, we could do worse than to think about our priorities for ensuring innovation in the years to come.