Fri, Jul 3, 2020

Research and development still key to competitiveness: But for whom?

GeoTech Cues by Robert A. Manning, David Bray, PhD

China Economy & Business Education Entrepreneurship Internet of Things Space Technology & Innovation United States and Canada

“The best way to predict the future is to invent it.”

Quote ascribed to Alan Kay

As the 4th of July nears and the United States prepares to celebrate Independence Day, it is worth reflecting that the year 2020 and the decade ahead must be spurred on by a new “Sputnik moment” for the country, this time inspired by the swift growth of China’s technological capability over the past decade and its overt, all-out push to surpass the United States as a technological and geopolitical leader. At present, there is too much national posturing about China and too little competition with it. No sense of urgency has yet rippled through the country, as one did in the late 1950s.

The United States’ innovative edge has been ebbing for several years now. In total yearly research and development (R&D) spending for 2018 (the most recently tallied year), the United States still narrowly led China at $582 billion to $554 billion. However, there are vast differences in growth: China’s R&D spending has been growing by about 17% annually since 2000, while the United States’ annual R&D growth has been stuck at about 4%. US federal government R&D funding has shrunk steadily both as a percentage of GDP and in relation to private sector R&D, which now accounts for nearly 70% of all R&D spending. Notably, only 17% of all US R&D spending is for basic research.

However, in a world connected by the Internet, can national spending on R&D still translate into national competitive advantage? For societies that are closed or more restrictive of digital information flows, the answer might be yes, due to the facts that intellectual property is less likely to be lost and outside actors are less able to emulate innovations. For open societies, it is unclear, though, especially when companies operate trans-nationally and when global venture capitalists can simply buy innovative and their intellectual property.

Further, the type of research nations fund, as well as the quantity, is notable. Outside of the Defense Advanced Research Projects Agency (DARPA), the long-term mindset that has historically been key to US innovation—from the Manhattan Project to computer chips, the Internet, and GPS—is less common.  Some US companies are still haunted by the ghosts of historical R&D efforts that produced great innovation, like Xerox’s Palo Alto Research Center, which helped develop the modern graphical user interface, mouse-based computer interactions, object-oriented programming, laser printing, Ethernet networking, and large-scale integration for semiconductors but did not profitably commercialize its inventions.

Industry is mostly focused on the development side of R&D, leaving the basic research required for developing novel products to others, either in academia or government research labs. With US federal government R&D spending on basic research only at 32% of total federal R&D spending, breakthroughs in fields other those already being commercialized may occur elsewhere in the world,  or US researchers may lured outside of the country if foreign basic research creates novel fields of study that remain unfunded within the United States.

All told, it should be no surprise that at the center of US-China competition is a battle over technology. The world is in the midst of multiple technological revolutions – digital synergy of the Internet of Things, the gathering of massive amounts of data, advances in machine learning, developments in additive manufacturing and 3-D printing, production of new composite materials, commercialization of space and small satellites, and further advances in bioengineering and personalized medicine. These revolutions will increasingly define geopolitical standing. The question is whether these advances will define national strength or something different.

For decades, tech innovation has been the secret sauce in US economic prosperity and global predominance. Much of it –including the Manhattan Project, Project Corona and satellite reconnaissance, the semiconductors that spawned Silicon Valley, TCP/IP and the Internet, and GPS and geolocation services – grew from federal R&D funding for basic research.

However, all such game-changing technologies took years of and multiple “learning through experimentation” trials – otherwise known as learning from failure – and were the result of basic research funding and the strategic patience of US federal R&D spending. Now only 17% of US R&D spending is in basic research, and 40% of that is federally funded. Federal R&D spending has fallen to just over 0.6 % of GDP, the lowest level since the Sputnik era, and far below the peak period it inspired, which reached above 1.8%. The good news is that private sector R&D is booming, reaching nearly 70% of the US total spending in 2018. Still though, the bulk of private R&D spending (78%) is on applied development instead of basic research—in other words, aimed at commercial success in a two- to three-year timeframe. Business, necessarily focused on the bottom line, fears that basic research breakthroughs might be taken advantage of by competitors.

Pre-competitive basic research is not necessarily efficient. It often takes many years to yield results – five years in the case of the Manhattan Project, urgent as it was. Federal and university R&D is best positioned to support basic research. A US penchant for instant gratification, or more specifically, Congressional impatience, has tilted federal R&D spending toward funding the “doable.” Though spending on basic research is at an all-time high, as a portion of GDP it has fallen to levels unseen since 1962 (notably, only about 5.5% of Chinese R&D spending goes to basic research in 2018). Outside of DARPA, which has been a key driver of US innovation in the past, it has become more difficult for scientists and engineers working on non-military research with abstract concepts, often called “blue sky research,” to obtain funding.

Part of this might also be a consequence of the Internet itself. Specifically, the Internet now allows rapid dissemination of ideas and insights globally. This includes scientific papers as well as direct emails, chats, and videos with researchers. Ideas are no longer as geographically bounded as in the past.

Similarly, the Internet has accelerated the global diffusion of new technologies. It took more than 25 years for 50% of US households to adopt the washing machine. Personal computers took about 18 years to be adopted by 50% of households. Cell phones took about 10 years. Tablet devices took about 6 years. On one hand, this means commercialization, if successful, can go global much faster than ever before. On the other hand, with the rapid diffusion of new technologies, innovators in other countries can remix any new device or development and come up with something better fast. This means any long-term R&D effort risks being out of date by the time it is done. The lifespan of the competitive advantage afforded to a nation or company by investing in blue sky research seems to be getting shorter and shorter.

Market dynamics also apply. For the last decade, it has become too expensive to commercially research and develop new semiconductors in the United States, partly because of the United States’ high standard of living and the competitiveness of the US dollar globally. There are cheaper places to do the R&D, often subsidized by governments hoping to attract research and create jobs in their own nations.

The United States faces hard questions regarding its desire for open and free markets, but the reality is that such markets may encourage the offshoring of research away from the United States, either for expense reasons or because research institutions cannot attract foreign researchers to the United States if immigration costs and policy prevent it. 

Lastly, in open societies, it is unclear whether national spending translates into competitive advantage. Employees who develop breakthrough ideas can simply be offered higher salaries or better stock options to work somewhere else. Yes, intellectual property laws exist, but with the right lab setup and funding, star researchers can take their ideas one level higher, working around any strong intellectual property protections. This also may explain why companies focus so much more on applied development than on basic research. However, there is growing bipartisan understanding of these issues, and pending legislation to provide a range of incentives for US firms to reshore R&D and production domestically offers new promise.

Policy implications

To maintain independence as a technology leader and regain the competitive momentum that has made the United States a prolific innovator, policymakers need to ask whether they are playing the right game for the 21st century: that of increasing competitiveness through R&D spending. From a strategic perspective, while R&D spending does still provide advantages to certain players, it is less clear how those advantages benefit open nations in an era of globally connected societies and companies.

If the United States is handicapping itself and its companies in its R&D strategy, then policy makers must consider changing how they play the game.

Action points

  • Identify new approaches to incentivizing and funding the innovation that creates jobs, increases profits, and uplifts people and communities.
  • Identify new ways of linking basic research done in the United States to “first mover” advantages created by applied development. Potential action includes funding to lure overseas R&D back to the United States, particularly in certain industries like semiconductor fabrication and telecoms hardware manufacturing.
  • Develop research alliances across nations that also value open societies, creating a political bloc for R&D funding with shared values, focus, and professionalism for its research community members.
  • Incentivize US students at the high school and college levels to pursue science and engineering degrees.

During the Cold War, the United States scouted for, recruited, and supported talent across the nation – including from both rural areas and inner cities. Now, in an era of budget cuts and historical sequestration, that mandate seems adrift. A growing number of science and engineering PhDs are foreign students, led by China and India – now approaching half of STEM PhDs. To a degree, this is simply a product of the numbers, as both China and India have approximately four times as many people as the United States. The United States needs to identify and attract talent both internally and from other nations if it is to address the raw population gap and secure a more innovative future for the United States and all nations that stand for openness, freedom, and choice.

It is worth reflecting on the second part of the Alan Kay quote that began this paper:

The best way to predict the future is to invent it. Really smart people with reasonable funding can do just about anything that doesn’t violate too many of Newton’s Laws!

Are the US government and industry putting sufficient funding into the R&D that will invent the future?

Note: the figures on R&D spending used for this article generally reflect 2018 spending, the most recent completely available year, and are inflation adjusted for current PPP USD. Other estimates for funding can vary significantly due to different definitions in spending and different base years, but generally reflect the same trends.

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