Commentary: Meeting the Asian Challenge

How America can boost innovation

The U.S. has always worried about falling behind in science and technology. In October, 1957, when the Soviet Union launched Sputnik, the first satellite, into orbit, Americans were stunned. With the Soviets' supposedly better-trained and educated scientists and engineers, it seemed just a matter of time until that country surpassed the U.S. both militarily and economically.

In the 1980s, the designated bogeyman was Japan, which excelled in manufacturing while devoting 2.5% of its gross domestic product to nondefense research and development. The U.S., spending only 1.8% of GDP on civilian R&D, seemed sure to become a technological laggard.

Of course, the predictions of imminent doom never came true. The scientific and engineering strengths of the Soviet Union and Japan were offset by abysmal weakness in governance and finance. Meanwhile, the U.S. responded effectively to both challenges, beefing up the resources devoted to innovation and education and reinforcing its position as the leading technological and economic power.

NOW IT'S TIME for another round of paranoia, with India and China playing the villains. China is running massive manufacturing trade surpluses with the U.S. Meanwhile, India seems to be absorbing big chunks of the U.S. info-tech job market, as politicians and corporate leaders warn darkly of endless supplies of inexpensive Indian engineers taking help-desk and programming jobs once held by U.S. workers. What's more, as U.S. companies open research centers in India, there are fears of a "giant sucking sound" -- to use a phrase H. Ross Perot once applied to Mexico -- as even high-end IT jobs leave the U.S.

Before abandoning ourselves to Perot's nightmare, let's do a reality check. First, any upgrade of the Indian and Chinese economies is an unalloyed good for the over 2 billion people living in those countries. These are poor nations finally climbing the ladder of economic development.

Second, there's no evidence of a major flight of educated jobs from the U.S. The Bureau of Labor Statistics reports that employment of college-educated workers has increased by 3.6% in the past year, despite a stagnant overall job market. And info-tech hiring has finally turned up, with employment in computer and mathematical occupations growing by 152,000 since June.

Still, the U.S. can't be complacent. As India and China ascend the economic ladder, the U.S. must do all it can to bolster its strength in innovation. That's how the country can create well-paying new jobs. Even if some research is done in India, Russia, or Japan, U.S. scientific and financial leadership will ensure the strength of the domestic economy.

Thus, the U.S. needs to focus on improving the four key components of innovation: R&D spending, education, finance for invention, and the national willingness to take risks. Here's what should be done in each of these areas.

-- Boost government spending on R&D. Adding $10 billion or more to government civilian R&D spending -- a roughly 20% hike -- should seem like a no-brainer. After all, R&D is the starting point for all technological innovation. In particular, basic research and early-stage applied research is quite properly the province of government.

But federal spending on R&D has not kept pace with the economy's growth. Figures from the National Science Foundation show that government R&D outlays fell from 0.96% of GDP in 1992 to 0.67% in 2000 before bouncing back up again over the past few years. But even the latest rebound in federal R&D spending has been concentrated almost entirely in the areas of defense and health. In fact, federal spending on civilian nonhealth areas such as energy has risen much slower then GDP over the past 10 years.

-- Add funding for graduate science and engineering students. It's impossible to do cutting-edge research without PhDs in science and engineering -- and that's a problem. Since 1997, the number of science and engineering doctorates going to U.S. citizens or permanent residents has dropped by 16%. That includes a 25% decline in math and computer-science PhDs.

That makes it essential to increase direct scholarship support for graduate science and engineering students. In addition, enlarging R&D funding would open up additional science and engineering jobs and make the degree more attractive.

-- Encourage vibrant financial markets. Other countries have fine technology and smart workers, but the biggest competitive advantage for the U.S. in the 1990s was its financial markets. Venture capital, high-yield bonds, and initial public offerings provided market financing for innovative tech companies on an unsurpassed scale, which helped create enormous numbers of new jobs in the U.S.

Still, continuing reports of corruption threaten to undermine the U.S. financial edge. That means it's necessary to aggressively prosecute corrupt individuals and companies while adopting a philosophy of transparency that gives investors the information they need to make good decisions.

The U.S. shouldn't cripple the flexibility of its financial system with too much regulation, though. The U.S. IT industry prospered in the '90s by using stock options to attract top talent from all over the world; they came because of the chance to win big if their company went public. Thus, it's counterproductive to make it harder for innovative companies and startups to use stock options to compensate their employees.

-- Strengthen anew our willingness to take risks. The financial bust, the 2001 terrorist attacks, and the struggles in Iraq combined to wound U.S. optimism. Rather than embracing innovation, Americans seem to be concerned with adopting protectionist measures and trying to hold on to existing jobs.

Rather than worrying about IT positions going offshore, the U.S. should focus on generating new jobs -- in new industries -- at home. In the end, an open economy, a commitment to invest in innovation and education, and a willingness to take risks will lead to success for Americans and for the U.S. economy. Together, those factors turned the "jobless economy" of the early 1990s into a boom with a 4% unemployment rate. They will work today as well.

By Michael J. Mandel

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