If We Had a National Competitiveness Policy Based on Innovation, How Would We Know It Was Working?

June 5, 2018

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A growing number of policymakers and pundits appear now to understand that the United States’ lead in innovation is not as secure as it once was. The country’s once seemingly immutable advantages—including overwhelming government spending on R&D, the largest domestic market, the most entrepreneurial culture, and the best technology-transfer and venture capital systems—have either been lost or significantly diminished in relation to its competitors’ assets. As such, more attention is finally being paid to restoring America’s standing. Hopefully this will lead to a more focused and better-funded national innovation policy. But if so, then how will we know it is succeeding?

There are four key metrics to watch in evaluating U.S. innovation and technology-based competitiveness:

  1. The trade balance in high technology goods and services;
  2. The overall size of the high-technology goods and services sectors;
  3. The relative activity in emerging, next-generation technologies; and
  4. The spatial distribution of advanced technology industries in the United States.

Trade Balance in Advanced Technology Products

The global market for products in advanced-technology industries (semiconductors, drugs, jet aircraft, machine tools, robots, AI systems, etc.) is fixed in size, at least in the short term. This means not only that one firm’s gain in market share is another’s loss, but that one nation’s gain is another’s loss. As such, a key measure of global success is the trade balance in advanced technology products and services. According to the U.S. Census Bureau, the U.S. trade balance in advanced-technology products, adjusting for inflation, went from a surplus of $6.6 billion in 2001 to a deficit of $55.2 in 2006, and then to a deficit of $110 billion in 2017.

Advanced Technology Value-Added as a Share of GDP

One key way to assess the growth of the advanced-technology sector is to examine how much value it generates for the U.S. economy—in other words, its industry value-added as a share of GDP over time. This allows us to compare how fast the advanced-technology sector has grown relative to other non-technology-based sectors. According to the Organization for Economic Cooperation and Development, U.S. advanced industries’ value-added remained essentially unchanged from 2000 to 2015, increasing only slightly from 7.45 percent of GDP to 7.48 percent. These industries include chemical, pharmaceutical, computer, electronic, transportation manufacturing, information technology–related, and research and development services.

Position in Emerging Industries

Even if the United States was performing adequately in the two indicators above, it may be poorly positioned for the future, especially if it is not inventing and innovating in emerging high-growth industries. One way to assess performance in these industries is to exam patent filings. Another is to examine tech-based start-up activity. ITIF examined start-ups in 10 different technology industries and found that the total number of tech start-ups increased 47 percent from 116,000 firms in 2007 to 171,000 firms in 2016. Meanwhile, patents in a number of advanced technologies increased significantly from 2005 to 2015, according to the U.S. Patent and Trademark Office: 223 percent in artificial intelligence, 195 percent in robotics, 440 percent in hybrid electric vehicles, and 288 percent in nanotechnology.

The Spatial Distribution of Advanced Industries

While the trade balance, output, and emerging-industry strengths are important in assessing the health of the U.S. advanced-industry sector, the industries provide more benefit, all else being equal, if they are relatively evenly distributed across the nation, because it provides economic opportunity not just for a few tech hubs. According to the U.S. Bureau of Labor Statistics, the top 10 states had a high-tech job-location quotient of 1.23 in 2016, down slightly from 1.25 in 2006. In other words, there were 23 percent more high-tech sector workers as a share of all workers in these 10 states than in the overall U.S. economy. Given the widespread view that advanced industries are only a coastal phenomenon, these data, as well as ITIF’s report “High-Tech Nation,” suggest that the “wealth” is spread more broadly than is widely understood.

American Needs a More Robust National Competitiveness Agenda Based on Innovation

ITIF has written extensively about what a national innovation-based completeness agenda should look like. In short, it involves not just considerably more funding for innovation, but also more stable funding (both direct expenditures and tax expenditures); more focus on public-private R&D partnerships (like the Manufacturing USA network); better policies to spur technology commercialization, especially from national labs and universities; more funding and institutional reforms for STEM talent; and regulatory reform to enable innovation, especially for new technologies. And while U.S. performance in innovation-based industries is still relatively strong, given strong foreign efforts (both fair and unfair) and lagging U.S. efforts, particularly the stark declines in government funding for scientific and engineering research, we should not be sanguine about the future. But we certainly should put in place a more comprehensive and robust national innovation-based competitiveness agenda—and we should begin to carefully measure its performance in the four key areas described here.