Manufacturing Innovation

by Reihan Salam

Howard Wial of Brookings doesn’t think David Brooks goes far enough in his agenda for promoting innovation, and he offers a critique of what he calls “textbook economics.”

Brooks  seems so obsessed with avoiding the perennial bugaboo of an industrial policy in which the government “picks winners” that he can’t take the next logical steps from his innovation advocacy: The federal government needs to support the process of innovation, not just the inputs to innovation and the market environment. To take the needed steps, Brooks should advocate more federal spending on programs like the Manufacturing Extension Partnership Program and the Advanced Technology program. He might even go further and support Rob Atkinson’s and my proposal for a National Innovation Foundation, a federal agency whose purpose would be to promote innovation. That would be a huge step.

The Economist offered a sober critique of the Wial-Atkinson approach last year.

Messrs Atkinson and Wial cite statistics that show the country’s share of worldwide total domestic R&D spending fell from 46% in 1986 to 37% in 2003 as evidence that the nation’s leadership is under threat. And they bemoan the shifting of American R&D overseas: in the last ten years, they claim, the percentage of US corporate R&D sites within America fell from 59% to 52%, while the number in China and India rose from 8% to 18%.

Yet by many traditional measures, such as the number of patents registered and levels of venture-capital funding, America remains ahead of the global pack. And its research is still widely recognised as being top-notch: the 2006 science Nobels all went to Americans. As for “offshoring” R&D, this reflects US firms’ desire to tap into huge markets abroad and to understand the potential of ideas being developed there.

Wial argues that he is offering a “real-world” perspective, yet scholars who have dedicated years of their life to understanding entrepreneurial firms have drawn very different conclusions. My main concern is that Wial hasn’t seriously reckoned with the arguments made by Amar Bhide, one of the leading scholars of innovative entrepreneurship, in The Venturesome Economy. This interview with Inc. offers a rough summary of Bhide’s views. This excerpt in The American is even better at explaining the central role of “venturesome consumption” in promoting innovation. A review of Bhide’s book, also in The Economist, noted the following insight.

First, he argues that the obsession with the number of doctorates and technical graduates is misplaced because the “high-level” inventions and ideas such boffins come up with travel easily across national borders. Even if China spends a fortune to train more scientists, it cannot prevent America from capitalising on their inventions with better business models.

That points to his next insight, that the commercialisation, diffusion and use of inventions is of more value to companies and societies than the initial bright spark. America’s sophisticated marketing, distribution, sales and customer-service systems have long given it a decisive advantage over rivals, such as Japan in the 1980s, that began to catch up with its technological prowess. For America to retain this sort of edge, then, what the country needs is better MBAs, not more PhDs.

That is, business-model innovation is key. Bhide is basing his conclusions on a decade-long, extensive, ground-level survey of innovative firms. He doesn’t rely solely on “textbook economics” — quite the contrary.

Indeed, Wial’s post suggests that the idea of a government-led innovation policy is a new-fangled idea recognized by “a growing number of economists.” One could easily argue that it is in fact a very old idea that has lost traction in recent years, and that a growing number of economists give greater due to what William Easterly has called “the anarchy of success.” In evaluating government-led innovation policies, my sense is that some scholars are suffering from a serious case of confirmation bias: choose a metric that fits your favored narrative and emphasize it at the expense of others.  

It could be that taxpayers want to spend more money subsidizing the activities of for-profit firms, and if so their wish will almost certainly be granted. It’s by no means obvious, however, that this is a better way to encourage business-model innovation than Brooks’s input-driven approach. Indeed, I actually think that Brooks goes too far in emphasizing a target level of R&D spending, but that’s another question. Some support for technology monitoring and technology transfer might make sense, but my guess is that we could finance it by cutting spending on programs that don’t work or have proven counterproductive rather than simply spending more. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.