Yes, the U.S. Really Isn’t Contributing as Much to Global Innovation as Belgium

The American Enterprise Institute’s James Pethokoukis writes about ITIF’s Contributors and Detractors: Ranking Countries’ Impact on Global Innovation report in a new AEIdeas blogpost. We certainly appreciate James bringing attention to the report and calling it out as a “must read.” Yet his post does raise a degree of skepticism about ITIF’s report, questioning in particular the United States’ overall tenth place ranking and asking “If the U.S. is really less innovative than Belgium?”

It’s vital to remember that the intent of ITIF’s report is not to rank the world’s most innovative countries or to rank countries on their aggregate innovation output as measured by indicators such as numbers of new start-ups, numbers of digital economy “unicorns” valued at over $1 billion, or new technologies created—and, indeed, the report acknowledges that the United States leads the world in levels of absolute innovation output. Rather, the report’s objective is to assess which countries’ economic, innovation, and trade policies—on a per-capita basis, crucially—are doing the most to contribute to and the least to detract from global innovation. In other words, to ascertain which countries are producing the most positive global innovation spillovers by investing in public goods such as scientific research or educational attainment while introducing the fewest negative externalities, such as through onerous trade barriers or by manipulating currencies.

So, sure, the United States leads the world in aggregate public and private sector investment in research and development (R&D). But the latest data from the OECD shows the United States falling to tenth place in national R&D intensity (R&D investment as a share of GDP). This means that Korea, Japan, Israel, Sweden, Finland, Denmark, Taiwan, and Austria are doing more, as a share of their economies, to invest in new scientific discoveries that (while they can certainly produce benefits for the performing economy) spillover to benefit the entire world (explaining, for example, why one study found that about one-quarter of the total benefits of R&D investments in a G7 country accrue to its trade partners). Yet not only is the United States not investing as much in R&D relative to its peers, it’s also underinvesting relative to its historical norm; in fact, if America’s federal government invested as much in R&D as a share of U.S. GDP today as it did in 1983, the federal government would have to invest at least $60 billion more per year in R&D.

That’s the dynamic ITIF’s report tries to capture, and it also plays out for other indicators such as percent of university graduates entering scientific fields and scientific graduates per 1,000 citizens (a combined indicator where the United States ranks 16th among the 56 countries) or scientific researchers per capita (where the United States ranks 17th). Again, this means other nations are educating a greater share of their students in science, technology, engineering, and math (STEM) subjects and sending a greater share of their workforce into science, technology, and innovation-based fields.

A particular area where the United States underperforms in the study—and one which one suspects Mr. Pethokoukis would be in violent agreement with—is taxation. In terms of creating an innovation-incenting tax environment, the United States ranks just 49th of the 56 countries. The study found the United States to have the 49th highest effective corporate tax rate, and it noted that the United States is the only OECD nation in which the base corporate income tax rate did not decrease from 2000 to 2015, a period during which the average base corporate income tax rate of the 33 non-U.S. OECD nations declined by 22 percent. Likewise, the generosity of America’s R&D tax credit has also stagnated in recent years, falling from being the world’s most generous R&D tax credit in 1992, to just the world’s 27th most generous today. Furthermore, many other nations are outstripping the United States in developing new tax policy instruments—such as collaborate R&D tax incentives or so-called “innovation boxes” (which tax profits derived from various kinds of intellectual property at a lower rate)—to spur greater levels of innovation.

In fact, one reason Belgium outranks the United States in ITIF’s study is that it has implemented these types of innovation-incenting tax policies. Belgium also imposes fewer taxes on information and communications technology (ICT) products, offers more generous R&D tax credits, invests more in education per student, and virtually ties the United States on per-capita government funding of university R&D and scientific researchers per capita. Put simply, on many measures of innovation policy, the United States is not beating Belgium. And if that seems shocking, it is meant to be.

In fact, it’s also worth noting that countries’ scores on the 27 measures in ITIF’s Contributors and Detractors report are also a signal of the strength of their ability to innovate in the future. So it’s true, as Mr. Pethokoukis points out, that the United States does still create more high-impact startups than any other country. However, it’s also true that the rate of new business starts in the United States are now at or near a three-decade low, as a recent Kauffman Foundation study found. Similarly, the share of Americans under age 30 who own private businesses reached a 24-year-low in 2015. Likewise, Mr. Pethokoukis points out that the most innovative region of the United Kingdom (ranked third in the ITIF study), London, is nowhere near as innovative as tenth-placed America’s leading innovation region, the Silicon Valley/Bay Area. And while it’s certainly true that London isn’t as innovative as Silicon Valley, it’s also true that nowhere else in the United States is as innovative as Silicon Valley (even if there are pockets of strength in places such as Austin, Boston, and Seattle), and that we’d be a lot better off if a lot more of America looked a lot more like Silicon Valley.

That it’s America’s birthright to lead the world in innovation is a belief held by too many, explaining the cognitive dissonance aroused when studies such as ITIF’s fail to find the United States in global innovation’s pole position. And while, as noted, ITIF’s report focused on which countries’ economic, innovation, and trade policies do the most to contribute to global innovation, others such as The Global Innovation Index 2015—which does explicitly endeavor to measure countries’ innovation performance—ranks the United States fifth. Certainly, the United States remains one of the world’s innovation leaders—but the gap between the United States and other nations is far less than what it once was—and the United States has much to do to improve its innovation policy environment it if wishes to be assured of innovation leadership—for its own benefit and that of the world—in the future.