More on the Innovation Gap

Stephen DeAngelis

July 26, 2010

I first wrote about the so-called “innovation gap” back in September 2008 in a post entitled: Another Slowdown to Worry About — Innovation? In that post, I wrote: “Using the word ‘gap’ to generate fear or concern, began when the Soviet Union launched Sputnik and the U.S. declared there was a ‘space gap.’ Since then, anytime someone spots a challenge that they think needs addressing, they declare that some kind of ‘gap’ exists. By declaring something a ‘gap,’ a person is emphasizing that it is more than a challenge, more than a problem, it’s a crisis — a wound that desperately needs closing. The ‘innovation gap,’ if it exists, is just beginning to open.” The article that prompted that post was the review of a book entitled “Closing the Innovation Gap” which was written by Judy Estrin, the former chief technology officer of Cisco Systems. John C. Lechleiter, chairman, president and chief executive officer of Eli Lilly and Company, has now joined Estrin in calling for measures to close the innovation gap [“America’s Growing Innovation Gap,” Wall Street Journal, 9 July 2010]. He writes:

“America is the inventing nation. A stream of inventions helped make the 20th century the American century. We’ve always welcomed a diverse group of dreamers from across the globe and offered them opportunities to advance by virtue of their hard work. We believe in the free flow of ideas and built a public education system that was once the envy of the world. We have also steadfastly maintained a strong business climate that promotes the value of innovation and reinforces Americans’ frontier spirit that sees obstacles as challenges to be overcome. Unfortunately, America’s economy is in danger of losing what has always been our greatest competitive advantage: our genius for innovation.”

That’s a pretty bold assertion, but Lechleiter offers some evidence to back it up. He continues:

“A recent study ranked the U.S. sixth among the top 40 industrialized nations in innovative competitiveness, but 40th out of 40 in ‘the rate of change in innovation capacity’ over the past decade. The ranking, published last year by the Information Technology and Innovation Foundation, measured what countries are doing—in higher education, investment in research and development, corporate tax rates, and more—to become more innovative in the future. The U.S. ranked dead last. In other words, we’re at serious risk of falling behind.”

Whereas Estrin’s background was in information technology, Lechleiter’s background is in biopharmaceuticals. As one would expect from someone with that background, Lechleiter talks about what he sees in his particular area of expertise. He writes:

“The evidence is certainly mounting that we are facing today nothing short of an innovation crisis in America’s life sciences. The industry I know best, biopharmaceuticals, is facing unprecedented pressure. R&D costs continue to rise, fewer potential new medicines gain regulatory approval, and key products lose patent protection. In fact, the number of new molecular entities approved by the FDA over the past five years—92—is lower than in any other five-year period since I entered the industry in the late 1970s. Meanwhile, the rest of the world is not standing still. The U.S. is not the only country looking to the life sciences to drive economic growth, and the very qualities that brought much of the world’s research capacity to our shores could just as easily attract that work to Asia or elsewhere.”

Although Lechleiter’s op-ed piece is about innovation, it’s clear from that paragraph that profitability is a topic lurking just below the surface. Lechleiter has reason to be concerned considering the anger and frustration currently being directed at those involved in the field of healthcare. Costs, especially costs of medicines, continue to rise, and those being served feel more like victims than patients. It’s clear that Lechleiter, too, is frustrated. He continues:

“Let me be clear: When it comes to sustaining innovation, the burden remains on enterprising businesses. The one thing that industry has a right to ask of public policy is to help preserve the environment in which innovation is possible. The pursuit of innovation in any field is a difficult, high-risk venture. If innovation is to take root and grow, it requires a combination of elements I would describe as an ‘ecosystem.’ The first element of this ecosystem is an atmosphere in which innovation can thrive, a society that understands and appreciates scientific inquiry, and free markets where innovators can expect to be rewarded for the risks they take and the value they create. This has always been an American strength. Yet today you’ll hear some people say that we have all the innovation we need—or that, in this difficult economic climate, we just can’t afford it. But innovation is not the problem. It’s the solution.”

Personally, I haven’t heard anyone saying “that we have all the innovation we need.” Quite the contrary; I’ve heard a lot of people say that we need to innovate our way out the current recession (see my post entitled An Innovation Agenda). I certainly agree with Lechleiter that innovation is at least part of the solution to our current economic woes. Having indicated that a favorable business environment is the first element of his innovation ecosystem, Lechleiter identifies the second element of the ecosystem — nutrients — that must be fostered in order to “preserve our lead in innovation.” He writes:

“The second element of the ecosystem—nutrients—come in the form of monetary investments. For investors to take the risks associated with innovation, they must have a fair chance at earning a return for successful work. That requires solid protection of intellectual property; a fair, rigorous and transparent system of regulation; and a tax system that provides companies the ability and incentives to invest in innovation. The Senate continues to debate tax legislation already passed by the House that could prove pivotal for America’s innovative companies. While the legislation would extend the R&D tax credit, the bill also includes international tax revenue raisers that will hurt the U.S. economy and deplete American jobs. These taxes further exacerbate the problems with our corporate tax system, which is already out of step with the rest of the world. We need a system that provides the ‘nutrients’ for investment in the United States.”

Although Lechleiter borders on whining, I agree with him that taxing corporations makes them less not more competitive. With unemployment remaining unacceptably high in the United States, only a perverted logic would lead one to the conclusion that making companies less competitive is good for what ails America. Competitive and profitable companies are more likely to hire than fire employees. Employees — i.e., human capital — is the final element of Lechleiter’s innovation ecosystem. He writes:

“The final and most important elements are the seeds of innovation, which equate to talented people and their ideas. Human beings—with their talent and energy, creativity and insights—are a priceless resource, but one that is woefully underdeveloped in this country.”

I agree with him that creative people are the most important element of his innovation ecosystem, but I would have liked to have read more about why he thinks they are being “woefully underdeveloped in this country.” Could we do more? Of course. But, I see creative people all around me. In my first post on the innovation gap, I wrote: “My experience is that creative people come up with ideas all the time — they can’t help themselves. True entrepreneurs are risk takers, but the best entrepreneurs also have good business sense. It was the lack of business sense that caused the dom.com failures. I do agree that governments should be generating friendly business environments. It should be businesses that create jobs not governments.” Lechleiter offers his suggestions about what can be done to foster the development of creative people:

“There are three policies necessary to cultivate these seeds of innovation. First, with our kids falling further behind on international comparisons in education, we’ve got to get serious about broad improvement in science and math instruction in our grade schools and high schools. Second, we need immigration laws that allow and encourage top scientists from other countries to choose to work in the United States. This does not entail drastic changes, but a sensible increase in visas for highly skilled immigrants and a shorter, simpler green-card application process. Third, we need a well-funded basic research infrastructure within academic and government labs. What’s required is not some new ‘Manhattan Project,’ but a long-term funding commitment necessary to attract more outstanding scientists to basic research and keep them engaged in productive work throughout their careers.”

Those are all sensible suggestions. I have written posts on every one of them in the past. Lechleiter’s comments, however, seem misdirected to me. He’s obviously aiming his comments at members of Congress, but problems with our educational system and immigration concerns are most deeply rooted at the state rather than national level. I fear that the current political climate, which is characterized more by anger than forethought, does not provide the fertile soil necessary for the elements of Lechleiter’s ecosystem to flourish. Nevertheless, he concludes:

“Such policies can unleash America’s true capacity for innovation. With the right choices, we can preserve and enhance America’s priceless legacy of creativity in the life sciences and high-tech fields. The stakes couldn’t be higher. Innovation is the key to ensuring that when people look back at the 21st century, they will say that it was the second American century.”

Others see the same challenges identified by Lechleiter. For a very similar discussion, read Thomas Friedman’s op-ed piece entitled “A Word From the Wise.” [New York Times, 2 March 2010] Like Lechleiter, Friedman concludes: “While America still has the quality work force, political stability and natural resources [that multinational companies need], … the U.S. is badly lagging in developing the next generation of scientific talent and incentives to induce big multinationals to create lots more jobs here.” There is certainly more to write about on this subject and I suspect this won’t be the last post in which I address it. I’m just hoping that those voicing concerns about America’s future aren’t shouting loudly in a forest of policymakers, who like trees, stand stiffly at attention but hear nothing.