DIU chief: Earnings focus thwarts innovation

The U.S. risks losing its competitive edge over China in terms of technology because companies care more about quarterly earnings than research and development. That's the message Michael Brown, director of the Defense Innovation Unit, the Defense Department's innovation arm, shared at a Brookings Institution virtual event May 8 on China's technological impact worldwide.

"You're never going to win in a technology race with defense," Brown said. Instead, the U.S. needs to focus on being more productive and "invest in itself" with more basic research.

Brown said that solutions involve incentivizing U.S. companies to focus on long-term investments and research.

"What do we do to reform our business thinking and our capital markets to move away from short-term thinking to be more long-term oriented," Brown said. Ways to focus U.S. companies on building and maintaining a competitive edge include stricter export controls and more scrutiny of foreign investments in U.S. companies, particularly technology startups.

Brown, formerly CEO of Symantec, said the corporate focus on quarterly earnings and stock prices is counterproductive to competing with China.

"They all feed into this short-term thinking in our business community," said Brown, "we have to reform this or we're not going to be successful in competing with China."

Incentives could include tax advantages for focusing on long-term growth and research and development, Brown said. And on the punitive side, there is the possibility of establishing penalties for U.S. companies that off-shore manufacturing or spinning off hardware businesses whose domestic presence can support U.S. jobs and military production.

"The irony is that U.S. companies focus on profits often driven by market dominance ends up aiding China's cause," Tom Wheeler, former Federal Communications Commission chairman, said during the event. "The market control, market dominance that we've seen from the principal big tech companies thwarts competition driven innovation."

"It is doubtful that we will be able to out implement China," said Wheeler, referencing that country's tightly controlled, one-party system of government. "But we can out-innovate China if we have policies that will encourage this competition driven innovation."

The big question for DIU is whether it can take advantage of U.S. tech talent, startups and research dollars to maintain a long term advantage over China, which is able to dictate its priorities to industry.

"The Defense Innovation Unit spends all day every day trying to encourage innovative companies to work with the Defense Department," Brown said. "And General Secretary Xi [Jinping] accomplishes this by fiat. So we have to recognize that there are some advantages to their system."

Brown said he maintained some doubts about the ultimate success of the "civil-military fusion" practiced in China.

"I don’t know how well that’s going to work for them, but that certainly keeps me up at night," he said.