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U.S. Innovation Is Failing, or It’s Never Been Better


BusinessWeek TimeTwo stories came out this week from Business Week and Time, with polar opposite views of what’s happening with U.S. innovation. Here’s the glass-is-half-empty version from Business Week, The Failed Promise of Innovation in the U.S.:

“We live in an era of rapid innovation.” I’m sure you’ve heard that phrase, or some variant, over and over again. The evidence appears to be all around us: Google (GOOG), Facebook, Twitter, smartphones, flat-screen televisions, the Internet itself.

But what if the conventional wisdom is wrong? What if outside of a few high-profile areas, the past decade has seen far too few commercial innovations that can transform lives and move the economy forward? What if, rather than being an era of rapid innovation, this has been an era of innovation interrupted? And if that’s true, is there any reason to expect the next decade to be any better?

There’s no government-constructed “innovation index” that would allow us to conclude unambiguously that we’ve been experiencing an innovation shortfall. Still, plenty of clues point in that direction. Start with the stock market. If an innovation boom were truly happening, it would likely push up stock prices for companies in such leading-edge sectors as pharmaceuticals and information technology.

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Instead, the stock index that tracks the pharmaceutical, biotech, and life sciences companies in the Standard & Poor’s (MHP) 500-stock index dropped 32% from the end of 1998 to the end of 2007, after adjusting for inflation. The information technology index fell 29%. To pick out two major companies: The stock price of Merck declined 35% between the end of 1998 and the end of 2007, after adjusting for inflation, while the stock price of Cisco Systems (CSCO) was down 9%.

Consider another indicator of commercially important innovation: the trade balance in advanced technology products. The Census Bureau tracks imports and exports of goods in 10 high-tech areas, including life sciences, biotech, advanced materials, and aerospace. In 1998 the U.S. had a $30 billion trade surplus in these advanced technology products; by 2007 that had flipped to a $53 billion deficit. Surprisingly, the U.S. was running a trade deficit in life sciences, an area where it is supposed to be a leader.

A more indirect indication of the lack of innovation lies in the wages of college-educated workers. These are the people we would expect to prosper in growing, innovative industries that need smart, creative employees. But the numbers tell a different story. From 1998 to 2007, earnings for a U.S. worker with a bachelor’s degree rose only 0.4%, adjusted for inflation. And young college graduates—who should be able to take advantage of opportunities in hot new industries—were hit by a 2.8% real decline in wages.

The final clue: the agonizingly slow improvement in death rates by age, despite all the money thrown into health-care research. Yes, advances in health care can affect the quality of life, but one would expect any big innovation in medical care to result in a faster decline in the death rate as well.

Now here’s what Time Magazine says in How Twitter Will Change the Way We Live:

When we talk about innovation and global competitiveness, we tend to fall back on the easy metric of patents and Ph.D.s. It turns out the U.S. share of both has been in steady decline since peaking in the early ’70s. (In 1970, more than 50% of the world’s graduate degrees in science and engineering were issued by U.S. universities.) Since the mid-’80s, a long progression of doomsayers have warned that our declining market share in the patents-and-Ph.D.s business augurs dark times for American innovation. The specific threats have changed. It was the Japanese who would destroy us in the ’80s; now it’s China and India.

But what actually happened to American innovation during that period? We came up with America Online, Netscape, Amazon, Google, Blogger, Wikipedia, Craigslist, TiVo, Netflix, eBay, the iPod and iPhone, Xbox, Facebook and Twitter itself. Sure, we didn’t build the Prius or the Wii, but if you measure global innovation in terms of actual lifestyle-changing hit products and not just grad students, the U.S. has been lapping the field for the past 20 years.

How could the forecasts have been so wrong? The answer is that we’ve been tracking only part of the innovation story. If I go to grad school and invent a better mousetrap, I’ve created value, which I can protect with a patent and capitalize on by selling my invention to consumers. But if someone else figures out a way to use my mousetrap to replace his much more expensive washing machine, he’s created value as well. We tend to put the emphasis on the first kind of value creation because there are a small number of inventors who earn giant paydays from their mousetraps and thus become celebrities. But there are hundreds of millions of consumers and small businesses that find value in these innovations by figuring out new ways to put them to use.

There are several varieties of this kind of innovation, and they go by different technical names. MIT professor Eric von Hippel calls one “end-user innovation,” in which consumers actively modify a product to adapt it to their needs. In its short life, Twitter has been a hothouse of end-user innovation: the hashtag; searching; its 11,000 third-party applications; all those creative new uses of Twitter — some of them banal, some of them spam and some of them sublime. Think about the community invention of the @ reply. It took a service that was essentially a series of isolated microbroadcasts, each individual tweet an island, and turned Twitter into a truly conversational medium. All of these adoptions create new kinds of value in the wider economy, and none of them actually originated at Twitter HQ. You don’t need patents or Ph.D.s to build on this kind of platform.

Hogwash

My own opinion is that Time is right, Business Week is off here.  Business Week’s article makes a tough-to-sell argument based on the stock market and stagnating wages. It looks at trade deficits, and death rates. These macro factors certainly reflect innovations, but they’re affected by too many factors to lay it all at innovation’s feet.

While I don’t have a decade-by-decade list of innovations to back up my view, I in no way think we’re living in a period of failing innovation.

We, as people, are just as creative as we’ve always been. There’s been no mass mutation of our genetics to cause a decline there. The same spirit that compelled our great-grandparents is alive and well inside us. If there was a drop in innovation, it would need an identifiable systemic cause. Business Week doesn’t provide that.

We’re living in an era where entrepreneurship has never been more accessible. Capital, outside of dips in the economic cycle, is readily accessible. Technology is cheaper than ever. The ability to leverage the web for marketing and information is unprecedented.

The Time article gets it right. The innovations continue apace, many of which are more distributed than before. I saw this firsthand at Maker Faire, where average folks are turning out all sorts of cool things.

When you distribute the innovatin’ to the people, it’s only a matter of time before a wave of new ideas will emerge for all of us to enjoy.

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About Hutch Carpenter
Senior Consultant for HYPE Innovation (hypeinnovation.com)

5 Responses to U.S. Innovation Is Failing, or It’s Never Been Better

  1. CJ says:

    BusinessWeek made a good point about innovation in the tech sector. It is clearly the most visible. It is also the one sector of the economy that has the least amount of government regulation and interference. In such an environment, innovation is free to blossom.

    Sadly, the government is starting (ever so slowly) to encroach…There has been an appointment of a “Tech Czar”…and major tech companies have gone into the lobbying game. While these are small developments, and may seem minor now, they may turn out to be the opening wedge for more anti-innovative actions.

    Other then the tech area, the U.S. economy carries a heavy burden of regulatory minutia. And every administration, whether Republican or Democrat only adds to the weight. It is no wonder that (overall) we don’t see higher quality and lower prices (like we have grown accustomed to in tech).

    Fortunately, the U.S. is not the only game in town. If innovation doesn’t happen here, it happens in other parts of the world where economies are freer. If manufacturing doesn’t happen here, it happens in other parts of the world where production is encouraged.

    Bureacracy stifles innovation…and the U.S. has, without question, turned into a giant bureacracy. Sadly the trend is for more of the same.

    Eventually it’ll turn.

    • I’m more optimistic than you on this one CJ. Regulation has always been there, in one or fashion. People innovate because they enjoy the pursuit, regardless of government Form 459B or water conservation requirement or what-have-you. I don’t see that changing.

  2. Mike Bucci says:

    Hutch,

    Your assessment on the causality espoused in the Business Week article is right on. The relationships that they are claiming are tenuous at best. Arguing that the efforts of innovators are a cause for global warming is a comparably ridiculous counter argument!!!

    Perhaps a more rational indicator would be the volume of patent applications and patents issued. There are some very good statistics available on the US Patent and Trademark Office Website at http://www.uspto.gov/go/taf/us_stat.htm. The stats show a continual increase in the numbers here.

    There is a more rational argument between investments in innovation and major economic indicators. Simply put, corporations are more likely to invest in speculative activities at times where business is strong.

    Mike

    • Hey – thanks for that link Mike. I’ve seen references to the number of patents, great to see the source. And I think your point about the economy is a good one. I notice a dip in 2008, but can’t help but think that the last quarter was probably awful for innovation, or anything at all really.

  3. Mike says:

    Hutch,

    We have all heard the saying that every time a door closes, a window opens. In this case, any reduced spending by major corporations on innovation opens the door for smaller players to fill that gap.

    As a small business owner who specializes in unique, value-added products, I can tell you that there is a real benefit in approaching retailers when you have reduces competition. Additionally, the current economy has reduced spending on “the same old stuff” and retailers recognize that new products are a way to get consumers excited about opening their wallets.

    Whether the glass is half-full or half-empty depends upon how thirsty you are!!!

    Mike

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