If the United States is going to "win the future" by out-competing the rest of the world, as President Obama often says, we're going to need to become more innovative. But how? John Kao is the author of Innovation Nation and the chairman of the Institute for Large Scale Innovation, an international coalition of chief innovation officers from more than 20 countries. Here is an edited transcript of our conversation about Silicon Valley, what's wrong with the U.S., and why health care reform needs more iPads.You live in San Francisco. Here's something I've always wondered: Why is Silicon Valley in Silicon Valley, and not in, say, Philadelphia or Miami? Is it Stanford's influence and the nice weather?

Stanford's tech and science departments are strong and the weather is great, but that's not all. You also have a culture of innovation that emerged organically. You have people like Pitch Johnson, who set up shop in Palo Alto and helped found modern venture capital. You have government financing of defense technologies in the area, which other entrepreneurs built on. You have Xerox Parc [Palo Alto Research Center], which created graphical user interface, which Steve Jobs visited and it inspired him to build the first Apple computers.

In Silicon Valley, the chain of invention is very visible. People go to school together, start companies together, share experiences together, and introduce each other to other entrepreneurs. This informal network has sustained Silicon Valley. People who strike it rich grow up to become angel investors and help the next generation. You had the hardware rich, then the software rich, and now the social media rich.

What is going wrong in the U.S.?

We're having a "Silent Sputnik" moment. We have a huge innovation challenge but there's no Sputnik moment to galvanize us. There's not enough money coming forward to turn bright ideas into real value. And look at our public education system. One study by Hopkins said 10% of public schools are dropout factories with a 40% dropout rate or worse.

Let's say you were going to give the president a one-page sheet. And on this one-page sheet, you would list the most important first steps toward a smarter innovation policy. What would be on that list?

We can talk about government R&D spending and the tax treatment of gains, but at the top we need some kind of public-private federal stewardship that can guide innovation. We have an elite group of venture capitalists across the country, but we don't have a national group of stakeholders to guide our innovation policy.

You're saying that government has to play a role in innovation.

Yes. Every other country in the world understands that government is a part of innovation. It sets policy, it's a source of demand, it sends signals, it influences education policy, and it launches Manhattan Projects.

What are other countries getting right?

They are setting clearer aspirations for what innovation should do. Singapore wants to be seen as a vibrant model for the global creative class. China is all about driving national development. In Australia, the emphasis is about well-being and balance between nature and urbanization, the citizen experience. In Finland, they talk about promoting health and wellness and there's a special focus on mobile technology.

Give me an example of an area that's ripe for disruptive innovation here and now.

If people took their medication correctly, health care issues would go down. We should have design firms and software companies making apps for the iPad2 and other devices to remind people with common or recurrent diseases to take care of themselves. That's what it means to have a larger integrated perspective on health care. New personalized medicine could be really disruptive.

I want you to respond to this idea from Paul Saffo that we're entering a new phase of economic development. We've gone through the producer revolution, the labor revolution, and consumer revolution, and now we're in this fourth phase where the central economic actor is the producer/consumer. It's the online Web reader who gives the advertiser eyeballs, the Googler who gives his search string to the company. What reaction to you have to the social media revolution?

I think Facebook is stimulating creativity by making people come together. It's almost like a digital nervous system for innovation. But the social media explosion is probably a bit of a bubble. When Facebook gets a $85 billion IPO and Groupon gets its $25 billion, you can see a bubble is forming. The top five social media valuations today are equal to the top 20 dot-com companies in the cash out. It's even more of a winner-take-all.

You're constantly traveling, observing, learning. What's the last thing you learned?

I went to Newsweek's Women in the World conference and learned about the condition of women in the world. One thing I learned was how societies that suppress women aren't very innovative. Societies that embrace gender equality are high on innovation.

What about China?

China's an interesting case. Mao was actually big feminist, he was about equality in the Little Red Book. There is a strong culture of women's rights in Chinese cities, but a counterbalance in the country where peasants wish for a male heir and superstitiously think a female will end their bloodline.

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