How the U.S. Government Falters on Support for Innovation

August 28, 2019

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If the U.S. economy is to regain its international competitiveness, especially vis-à-vis China, it will have to accelerate innovation, including in advanced-industry production. There is a growing consensus from both Democrats and Republicans that the federal government needs to play a stronger role in that process. So how is the federal government doing? Not so well, if you think that government needs to approach innovation success in a similar way as the most innovative corporations.

A 2013 report from the consulting firm Bain examined the factors that enabled leading firms to “crack the code on innovation.” Bain found that there was not one single factor that enabled innovation leadership; rather, successful companies built an entire system around five key components.

  1. Leaders set a clear, specific strategy for innovation;
  2. They build an organizational culture that nurtures new products and processes;
  3. They create effective processes for idea generation and development;
  4. They know how to manage a diverse portfolio of innovations, including incremental and radical;
  5. They are effective at scaling new business ideas.

While government is not business, there are parallels. And if the federal government were an enterprise, it would not be getting “A’s” on these factors. 

Let’s start with a strategy for innovation. The last time the federal government had anything resembling a national innovation strategy was almost 40 years ago when the Carter administration issued its Domestic Policy Review of Industrial Innovation and President Reagan’s Commission on Industrial Competitiveness released its strategy. Since then a combination of hubris (such as the idea that the United States is the most innovative nation) and neoclassical economic dominance (like the argument that any economic strategy is one step away from Soviet Gosplan) has meant that any efforts to create a strategy were squashed. And even when these have been attempted, as the Obama administration did with its Strategy For American Innovation, these were simply statements of Administration priorities rather than real strategies based on analysis. The result is that the federal government takes an ad hoc approach to innovation policy, rather than approach it in a strategic way. And as a result, it misses significant opportunities. There’s also a lack of institutionalization in U.S. innovation policy making; Congress doesn’t require any federal agency to be accountable for innovation policymaking, so an administration only produces an innovation strategy if it’s inclined to do so.

Next, an organizational culture that nurtures new products and process would be, in this case, new policy ideas and organizational practices. Few if any federal agencies formally recognize the promotion of innovation (either internally or externally) as part of agency agendas or strategic plans. And this is in part because innovation is not explicitly incorporated in agency missions.

Third, building processes for idea generation. One way the best organizations generate new ideas for development is to create “skunk works,” or separate organizational entities not constrained by the dominant corporate mindset or rules. Pioneered by Lockheed in the 1950s, several major corporations now have similar entities. The idea behind skunk works is to create a dedicated space, less unencumbered by the day-to-day concerns of providing services or products, and less unencumbered by the rules and routines governing companies. While a few agencies, such as the National Security Agency, Central Intelligence Agency, and the Department of Health and Human Services, have skunk works-like efforts, overall these are few and far between.

Fourth, effectively managing a diverse portfolio of innovations. While some agencies, like the Department of Defense and Department of Energy, do a better job than most at funding and managing diverse innovation—including incremental and transformative innovations, enabled by a variety of different technologies—most agencies either are too underfunded to manage a diverse portfolio, or they are too risk averse to fund high-risk, radical innovation.

Finally, effective at scaling new business ideas. Clearly government itself doesn’t scale new business ideas, but it can help. Former Intel CEO Andy Grove famously called for the establishment of a U.S. scaling bank because he rightly argued, “Without scaling we don’t just lose jobs—we lose our hold on new technologies” and “ultimately damage our capacity to innovate.” Again, outside of DOD there are few programs and limited dollars for programs to help scale innovations, whether it concerns grants for demonstration projects or loan programs for manufacturing.

For many decades after WWII, the United States could afford its ad hoc innovation strategy which mostly worked by throwing massive amounts of money at defense and space spending (in the early 1960s the U.S. federal government invested more in R&D than all other nations’, public and business funding, combined).  But after three decades of declining government support for R&D as a share of GDP, the U.S. strategy of winning innovation through overwhelming “force” can no longer work.  We need to be strategic. One place to start would be to pass the Senate National Economic Security Strategy Act (S.2757), introduced by Senators Young (R-IN), Merkley (D-OR), Rubio (R-Fl) and Coons (D-DE).

To build better organizational culture, the Trump administration should require that each major agency explicitly include an innovation component in its strategic plan that includes, among other measures, foresight/forecasting/scenario-planning activities. To lead these efforts, each major agency should designate one person as responsible for innovation, in the mode of Harry Truman’s “the buck stops here.”

To help agencies better generate new ideas for innovation, the Trump administration should establish a pilot program where four or five additional agencies establish skunk works focused on disruptive innovation within their agencies.

To better manage a diverse portfolio of innovations, Congress needs to step up to the plate by expanding agency funding for research and directing most of it to support radical, transformation innovation. 

And to help scaling, Congress should reform the Small Business Administration, as Small Business Committee Chairman Marco Rubio has proposed, to ensure that more lending and investment capital go to high-growth innovation-based firms.  A more radical proposal would be to repurpose Fannie Mae into an industrial support organization, not a housing finance organization. The very existence of Fannie Mae reflects the fact that America has put more emphasis on housing than on traded sectors such as manufacturing. The new Fannie Mae (perhaps called the Federal National Industrial Mortgage Association) would buy loans made to traded sector firms from banks and other lenders and sell them on the secondary market.

The United States can no longer afford to get by on past performance when it comes to the race for global innovation advantage. If it wants to avoid the fate of the United Kingdom, the innovation leader at the end of the 19th century, it needs a new approach – one modeled on the world’s most innovative companies.