What if we took the world's best ideas for helping young companies and stitched them together to create a kind of Innovation Super-Nation? Maybe it would look like this...
"The first step in winning the future is encouraging American innovation," President Obama declared in his 2011 State of the Union address. He's right. But what's the pathway to "encouraging American innovation?"
Innovation is a central element in promoting national economic performance, especially for the United States, which is at the technological frontier and can't effectively adopt technology invented elsewhere to achieve growth. As Paul Romer proposed in his New Growth Theory, investing in innovation is a crucial endogenous factor - and therefore one firmly in the grasp of policymakers - that creates economic growth. Future growth depends upon our ability to make new things. Nations with the ability to innovate are better poised to nurture entrepreneurship, attract early-stage risk capital and sustain a diversified ecosystem that bolsters long-term economic growth.
Some of the answers to our innovation challenge will come from within the U.S. We remain in many ways the most dynamic country in the world, with more top universities and multinational corporations than any other nation. But it's foolish to imagine that the best innovation ideas in the world already have a home in policies coming from Washington, D.C. Here is a world-wide tour of the best ideas that our government should import to jump-start innovation.
These policies encapsulate human capital, both indigenous and from immigration. Some are aimed at enhancing research and development (R&D), such as direct government funding of R&D, R&D tax credits and corporate tax rates. Others nurture innovative small and medium firms and improve access to risk capital. I've also considered policies encouraging technology transfer and commercialization from universities and other research centers and those relating to the overall business environment.
A BETTER WAY TO INVEST IN PEOPLE
First, let's look to Singapore, which developed a set of indigenous human capital strategies that radically altered its economy. In 1960 Singapore had a per capita GDP of $2,300, roughly equal to Jamaica's. Singapore focused on becoming a financial services and research hub, while Jamaica concentrated on tourism. Fifty years later Singapore's per capita GDP was $43,100, while Jamaica's is slightly above $5,000.
The difference was investment in human capital. Singapore's education system is heavily subsidized by its Ministry of Education to ensure a meritocratic principle that identifies and nurtures bright young students for future leadership positions. In the '60s, Singapore attracted foreign capital by targeting labor-intensive manufacturing to create jobs. As its workforce became better educated through its investment strategies in the '70s, it began attracting higher value-added industries such as petrochemicals, electronics and data storage. Today, Singapore is a leader in a host of knowledge-based industries, including the biomedical sciences. In just the past decade, the number of scientists has leapt from 14,500 to 26,600, a gain of more than 80 percent. In the most recent Global Competitiveness Report put out by the World Economic Forum, Singapore ranked 1st in the quality of its math and science education.
A BETTER WAY TO TREAT IMMIGRANTS
Best practices in high-skilled immigration policy can be witnessed in Canada. The government has consistently promoted Canada as a destination for immigrants and prides itself on having a fairly open and straightforward immigration process. In 2010, Canada welcomed 280,636 immigrants while the U.S. accepted 1,042,625 -- on a per capita basis less than one-half of the Canadian figure. Under the Canadian immigration system there are three categories: economic, family reunification and refugee. The economic class is based upon a detailed points system that calculates relevant skills. Canada, with a population one-tenth that of the U.S., accepted 186,913 "economic immigrants" in 2010, accounting for 66.7 percent of its total. These immigrants unquestionably contribute to economic growth, job creation and increased demand for housing. In contrast, the U.S. currently caps employment-based visas, including those with extraordinary skills, professionals holding advanced degrees, skilled workers and professionals, special immigrants (e.g. religious workers), and investors, at 140,000, or just 13.4 percent of all immigrants.
Toronto alone absorbs approximately 100,000 immigrants per year, the vast majority high-skilled (or members of Richard Florida's Creative Class) under the economic category and has transformed its economy. In addition, Canada is home to 981,137 temporary foreign residents, the majority of whom are either foreign workers or foreign students. Temporary foreign residents can apply for permanent residency in Canada under the "experience class."
A BETTER WAY TO INVEST IN RESEARCH
Innovation, along with entrepreneurship, involves a lengthy process of research and development, one that inevitably entails risk for firms and industries. There are three main categories of risk: regulatory, innovation and monetary. My research and others' shows that lucrative reward systems and regulatory structures directly influence the level of R&D activities. Tax credits are one way to effectively reduce the risks inherent in conducting R&D.
Some readers will be surprised to learn that France has the most generous tax incentives for R&D among the OECD countries. The government is continually expanding the scope of the tax credit, and the amount of funding available nearly doubled between 2006 and 2008. A company can receive up to 50 percent of its R&D costs the first year; 40 percent is covered the second and 30 percent in the third. There is a mechanism that allows funding to be "fast-tracked" for small- and medium-size enterprises, and in most cases, the waiting period for approval is only three months. Lastly, the tax credit is either deducted from the annual corporate tax or reimbursed after three years, providing greater flexibility. The tax subsidy rate per $1 of R&D in France averages 43 cents, while in the U.S. it is a paltry 7 cents.
Finland serves as another example of using policy solutions to transform its economy from resource-based to knowledge-based through consistently increasing gross expenditure on R&D. Simultaneously it has also pursued international scientific collaboration, university/industry partnerships, and enhanced venture capital availability. On a per capita basis, Finland now claims double the OECD average of patent output.