The Atlantic Century 2011: Benchmarking U.S. and EU Innovation and Competitiveness

The Great Recession was a shock to the global economy. While some nations were impacted much more than others, all nations felt the effects. And the Great Recession was much more than just an extremely severe cyclical contraction; it was a tremor that exposed the fault lines of economic weakness in many nations, including the United States and many in Europe. As such, these fault lines reflect in part a declining ability of these nations to effectively engage in innovation-based competition in the global economy.

In 2009, at the height of the Great Recession, ITIF published the first edition of The Atlantic Century, a report that assessed the global innovative-based competitiveness of thirty-six countries and four regions (the European Union (EU)-15 region, the EU-10 region, the EU-25 region, and the North Atlantic Free Trade Agreement region), both as they stood at approximately 2007 and in terms of their progress between the early 2000s and then. The report relied on sixteen indicators from these broad categories: (1) human capital; (2) innovation capacity; (3) entrepreneurship; (4) IT infrastructure; (5) economic policy; and (6) economic performance.

The results were a surprise to most and a wakeup call to many. The United States did not rank number one as many assumed. In fact, it ranked fourth out of thirty-eight nations or regions. And the EU-15 ranked even lower, 16 percent below the United States. But the results regarding the rate of progress were even more disconcerting. The United States ranked last in improvement in international competitiveness and innovation capacity over the last decade and the EU-15 region as a whole ranked just twentyeighth behind fourteen non-EU-15 nations, including China, Singapore, Japan, Russia, and S. Korea.

Now over two years later, we have an opportunity to revisit this question of who is leading and who is lagging, but with even more recent data and with the addition of several new nations (Argentina, Chile, Indonesia, Malaysia, South Africa and Turkey). And we find that the United States’ and EU-15’s ranks remain unchanged, fourth and eighteenth respectively. The United States leads Europe in twelve of the sixteen indicators, including knowledge (higher education and number of researchers); innovation (corporate and government R&D; information technology (IT investments, e-government, and broadband); overall business climate; entrepreneurship (new firms and venture capital), and productivity. The EU-15 leads the United States in just four of the indicators: academic publications, a lower effective corporate tax, trade performance, and foreign direct investment (FDI) inflows.

The United States lags behind several European nations, including Finland and Sweden. However, it is important to note when making comparisons between individual EU nations and the United States, that there is also significant regional variation within the United States. If we compare individual U.S. states against individual EU nations, the picture is quite different. In this edition, we compare the U.S. states to the 43 other countries or regions studied here across seven indicators and find that the nine most competitive U.S. states would lead the world if they were countries, while even the least competitive (Mississippi) would still fall towards the middle of the pack. Were Massachusetts its own nation, it would be the most innovative economy on the planet.

But in terms of progress and rate of change the picture is troubling to say the least. Of 44 countries and regions, the United States ranks second to last in terms of progress over the last decade, ahead of only Italy. This is slightly better than in 2009 when the United States ranked dead last. And the EU-15 ranks thirty-sixth in the rate of change behind twenty non-EU-15 nations. However, the story in the last few years is at least a bit more positive for the United States, which ranked twenty-seventh in overall rate of change from 2007 to 2009.

These findings continue to have significant implications for Europe and the United States. Both continue to lose ground in the race for global innovation advantage. We see that the two regions of the globe making the fastest progress are Eastern Europe and Southeast Asia. In terms of the former, the EU-10 still lags behind the United States and the EU-15, with overall scores at just 60 percent of the U.S. score. But five Eastern European nations – Cyprus, Slovenia, Estonia, the Czech Republic, and Latvia – are in the top ten in terms of rate of progress between 1999 and 2011. However, the Great Recession had a disproportionate impact on them, with Latvia actually ranking last in progress in the last several years, and Lithuania thirty-sixth. Southeast Asia, China and S. Korea are the top two nations in the rate of change over the last decade and Singapore ranks eighth.

Some of these findings reflect a simple process of catch up. Countries that are less advanced when it comes to innovation can perhaps advance more easily than countries at the leading edge. But some of the nations that have shown faster progress than the United States or the EU-15 are advanced nations, such as S. Korea, Japan, Australia, and Canada.

So where does that leave the United States and Europe? The simple answer is that unless they change course, the path they are in is a downward one, at least in relative terms. Regaining global innovation-based competitiveness means moving aggressively into next-generation industries, including advanced IT, robotics, nanotechnology, biotechnology, and high-level business services, while at the same time maintaining output in highly efficient and competitive traditional industries, and continually raising productivity in local non-traded sectors such as retail and health care, particularly through the widespread use of information technology.

There are two key steps Europe and the United States must take to increase the chances of this successful outcome. First, they need to join together in a robust free-trade alliance, in part to increase commercial linkages but also to put real pressure on innovation mercantilists, particularly in Asia. Innovation mercantilism hurts both the United States and Europe, and unless they band together to take a much tougher stance against it, both will continue to lose innovation-based competitiveness. As such, the United States and Europe must engage in a strategic partnership to push back against innovation mercantilism. A key step should be the establishment of a Trans-Atlantic Partnership, modeled after the Trans-Pacific Partnership.

While pushing back against innovation mercantilism will be an important step, it will not be enough. Both Europe and the United States also need to ensure that their domestic policies do a much better job of supporting innovation, productivity and competitiveness, through both increased government investment in innovation and lower taxes on corporate investment in innovation.

But each region has special challenges. For Europe, it’s to fully embrace innovation. As much as European leaders proclaim their support of innovation, many have a decidedly schizophrenic view of it. They want the benefits of a knowledge-based technology economy without the creative destruction that not only accompanies it but is required to achieve it. Unless Europe can accept that innovation entails plant closures and job losses, new technologies with uncertain social or environmental impacts, and new kinds of business models and organizations that may challenge traditional assumptions about matters like privacy, it’s unlikely that it will be able to keep up in the race for global innovation advantage.

America’s challenge is different. Its major challenge is not timidity, but torpidity. For too many in America believe that the United States has been number one for so long that it will continue to be number one regardless of whether it acts decisively. Given this situation, the thinking goes, there is no real need for the United States to develop and implement a national innovation-based competitiveness strategy. Moreover, to the extent that there is any strategy in the United States it should be to ensure that market forces are allowed to work (e.g., support free trade, restrict market power, simplify the tax code and deregulate market entry) rather than enact a proactive innovation competitiveness strategy. This ties into to America’s other big challenge, overthrowing the stale straightjacket of neoclassical economics that holds that countries don’t compete, that innovation is manna from heaven, and that government action to spur innovation only makes things worse. Instead, it needs to embrace a new “innovation economics” that puts advancing innovation at the forefront of economic policy.

So the question of whether the twenty-first century will remain the Atlantic century is one that remains to be seen. But we can be sure of one thing: it will not be the Atlantic century if Europe and America continue on the policy path they are on. If they can form an anti-mercantilism alliance, while addressing the unique challenges to domestic innovation policy each face, then we will see. Who knows, maybe this will be the Atlantic century after all.

* North American Free Trade Agreement region: Canada, Mexico and the United States.