Localizing the economic impact of research and development - Fifty policy proposals for the Trump administration and Congress

The investments government and businesses make in basic and applied research and development (R&D) plant the seeds for the technologies, products, firms, and industries of tomorrow. They contribute substantially to the fact that at least one-half of America’s economic growth can be attributed to scientific and technological innovation.

^{[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][1]} But the increased complexity of technological innovation as well as the growing strength of America’s economic competitors mean that it’s no longer enough to simply fund scientific and engineering research and hope it gets translated into commercial results. The U.S. government needs to expand federal support for research and, just as important, it needs to improve the efficiency of the process by which federally funded knowledge creation leads to U.S. innovation and jobs.^{[2 ]}

This report provides 50 policy actions the Trump administration and Congress can take to bolster America’s technology transfer, commercialization, and innovation capacity, from the local to the national level. These recommendations include:

Strengthen innovation districts and regional technology clusters

Bolster institutions supporting tech transfer, commercialization, and innovation

Expand technology transfer and commercialization-related programs and investments

Promote high-growth, tech-based entrepreneurship

Stimulate private-sector innovation

INTRODUCTION

Innovation is key to increasing economic growth and wages in the moderate to long run. Yet innovation does not fall like “manna from heaven,” as economists once suggested. It is the product of intentional human action, and, to have more of it, we must enact public policies that connect research and development investments to firms and inventors in the communities where they are located.

After seven years of growth following the end of the Great Recession and after over 70 straight months of employment growth, there is a case to be made that the country has rebounded and the main thrust of economic policy should focus on those who have been left behind. But the reason so many Americans aren’t seeing their wages rise fast enough isn’t just because they’ve been left behind, it’s because the country as a whole isn’t moving ahead fast enough.

It’s certainly true the labor market has begun to inch closer to full employment (in fact, in December 2016 the unemployment rate dropped to 4.6 percent), but that’s far from a leading indicator of the health of the U.S. economy. For the reality is the economy still has a long way to go to return to its full potential. Employment growth in the 36 months following the trough of the recession was the slowest of the 11 post-World War II recoveries, and average productivity growth was twice as high in the four decades following World War II as it has been since the end of the Great Recession.^[3] Brookings economists Martin Baily and Nicholas Montalbano describe the country’s productivity growth as “weak since 2004 and dismal since 2010.”^[4] And as the Information Technology and Innovation Foundation (ITIF) reports, U.S. productivity growth over the last decade is the lowest since the government started recording the data in the late 1940s.^[5] Yet if the United States could boost its productivity levels by even just one percentage point, it could make the economy $2.3 trillion bigger than it is otherwise projected to be in 10 years while shrinking the federal budget deficit by more than $400 billion.^[6]

America’s innovation economy exists at three levels: technological, industrial, and spatial.

Meanwhile, other countries are increasing their technological sophistication, capturing crowded international markets and pushing U.S. firms—and, by extension, U.S. workers—behind. And whereas once America’s leading technology competitors were largely isolated to Western Europe and Japan, today many developing nations are crafting innovation strategies designed to wrest leadership in advanced technology categories such as life sciences, clean energy, new materials, flexible electronics, computing and the internet, and advanced manufacturing. As evidence of these trends, the United States has run a trade deficit in advanced technology products every year since 2002; the cumulative deficit since 2010 is $580 billion.^[7] Improving America’s capacity to innovate is a key step toward confronting these challenges.

America’s innovation economy exists at three levels: technological, industrial, and spatial. Much innovation occurs in particular technology areas, for example life science innovation funded by the National Institutes of Health (NIH), additive manufacturing supported by America Makes, and composite and lightweight materials supported by the Institute for Advanced Composites Manufacturing Innovation (IACMI) and the Lightweight Innovations for Tomorrow (LIFT) Institutes for Manufacturing Innovation, respectively. Innovation also occurs across firms in the same industries that collaborate to drive technology advancements (e.g., aerospace and automotive). For this reason, sector- and technology-based innovation policies and programs like Manufacturing USA’s Institutes of Manufacturing Innovation and the Advanced Research Projects Agency-Energy do an effective job targeting R&D dollars.

The spatial level of innovation includes not just hot spots like Silicon Valley; Austin, Texas; or Boston, but also scores of communities throughout the country in places like Chattanooga, Tenn.; Denver; Minneapolis; Mobile, Ala.; and Pittsburgh, Pa. which are intensively developing their innovation ecosystems at the regional level. Indeed, as ITIF has shown, innovation occurs in all of America’s 435 congressional districts.^[8]

This dispersion matters because regional technology clusters engender concentrated knowledge flows and spillovers, workers with specialized skills, and dense supply chains that improve firm productivity. Many R&D-intensive firms benefit from proximity to innovation resources such as universities and federal laboratories, and this closeness produces myriad “ecosystem” benefits.^[9]

This is particularly the case for knowledge spillovers—the ability of workers and firms to learn from one another without incurring costs. Recent research shows that the value of proximity for firms and workers to share ideas attenuates extremely quickly with distance. For example, Rosenthal and Strange find that, for software companies, the spillover benefits are 10 times greater when firms are within one mile of each other than when they are two and five miles apart, and by 10 miles there are no more within-city localization benefits.^[10]

In other words, to be effective, technology policy needs to focus not just on the first two levels, technology and industry, but also on the spatial—the regional. Thus, if America’s innovation economy is to function maximally, Washington needs to promulgate smart policies and initiatives that effectively work in concert at the city, regional, state, and national levels.

The central component of an effective national technology policy system is robust government funding of scientific and engineering research. But in that respect, the United States is failing. If the federal government invested as much in R&D today as a share of GDP as it did in 1983, we would be investing over $65 billion more per year.^[11] Unfortunately, given budget and political constraints, the Trump administration and the forthcoming 115th Congress may find it difficult to significantly increase overall federal investment in science and technology. This despite the fact that doing so would be a wise investment, as economists estimate that a 1 percent increase in the U.S. R&D capital stock improves GDP by 0.13 percent.^[12]But regardless, one thing on which America should be able to achieve bipartisan consensus is the need to find ways to increase the return on investment from existing resources and programs.

What follows are 50 policy recommendations President Trump and Congress can enact to improve the economic impact of existing resources (with some modest additional investments). Many of these recommendations could be added to the COMPETES-related reauthorization legislation currently being considered in both the House and Senate. The recommendations are divided into five categories: strengthening innovation districts and regional technology clusters; launching or extending institutions supporting America’s innovation economy; facilitating technology transfer and commercialization activities; promoting the formation of high-growth firms; and stimulating private-sector innovation. These recommendations are the output of a joint research effort between the Brookings Institution and ITIF.

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Localizing the economic impact of research and development – Fifty policy proposals for the Trump administration and Congress

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INTRODUCTION

Authors

Stephen Ezell

Vice President, Global Innovation Policy -The Information Technology and Innovation Foundation

Scott Andes

Senior Policy Analyst and Associate Fellow – Centennial Scholar Initiative,Anne T. and Robert M. Bass Initiative on Innovation and Placemaking