The government's role in spurring innovation

“Innovation Economics: The Race for Global Advantage,” published in September by Yale University Press, explores the conditions that have caused the United States to fall behind other countries in the competition for the innovation advantage.

Authors Robert D. Atkinson and Stephen J. Ezell assess a wide range of factors to understand the challenges the country faces in regaining its position as a leader in innovation. Atkinson is founder and president of the Information Technology and Innovation Foundation, and Ezell is a senior analyst there.

This excerpt describes what the authors believe is the government’s role in carrying out innovative research and creating policies that encourage private-sector innovation.

While lack of resources is not always the problem, sometimes money matters. Cases in point are the numerous federal agencies that play a key role in innovation but that are woefully underfunded. The U.S. Patent and Trademark Office used to be the envy of other nations for its effectiveness and efficiency. But today a backlog of more than 700,000 patent applications at the USPTO means that most applicants will wait at least three years for a decision.

Likewise, there have been increased delays at the Food and Drug Administration for drug and device approval and difficulties in upgrading the scientific expertise needed to expeditiously and effectively evaluate new drugs and biological submissions. The U.S. Trade Representative’s Office brings relatively few cases before the World Trade Organization to challenge the mercantilist practices of other nations. And the U.S. statistical system needs to do a better job of providing the kinds of data that would help policy-makers understand the true condition of the U.S. innovation system.

In all of these cases, lack of funding has been the principal cause of suboptimal performance, and more resources would boost performance.

Innovation impact analysis

Innovation is the poor stepchild of cost/benefit analysis. For more than 30 years, the Office of Management and Budget’s Office of Information and Regulatory Affairs has reviewed proposed federal agency actions on the basis of cost/benefit analysis. In other words, will the agency regulation or action lead to benefits that exceed their costs? This is certainly important, but there is almost no analysis of how federal actions will affect innovation.

To remedy this, Congress should establish a small Office of Innovation Review (OIR) within the OMB whose mission would be to champion innovation within these processes. Such an entity would add an important new voice to the regulatory conversation. There would now be an entity speaking clearly and forthrightly on the centrality of innovation. More important, the OIR would not merely have a voice, it would be able to remand agency actions that harm innovation. It would also propose regulations that foster innovation. This is no small matter. Indeed, it would change the regulatory playing field overnight.

Funding tied to performance

The federal government routinely provides monies to other organizations (state and local governments, educational institutions, health care providers, and the like) to achieve some public purpose. But all too often, the accountability is process-based — did the funds get spent the way they were supposed to? — not outcome-based. Moreover, to achieve process-based accountability, federal rules often stifle creativity and innovation in organizations receiving support.

The federal government could be a catalyst for innovation if it tied its funding more closely to performance. Indeed, the federal government should explicitly use its power of the purse strings to drive innovation among the recipients of those funds. It should allocate money to agencies, departments or other benefactors that implement innovative policies or approaches. The idea is to take the same amount of money but allocate it as an incentive to drive performance improvements and innovation.

The Department of Education’s Race to the Top initiative is a model for spurring organizational innovation. The department offered $4 billion in grants to states committed to reforming their education systems. States that are unwilling to leverage data and accountability systems to improve measurable performance outcomes, that have legislation preventing the development or expansion of innovative school approaches, or that cannot demonstrate effective alliances with local teachers’ unions on performance accountability are not eligible.

After Tennessee and Delaware were awarded the first $600 million, nonqualifying states worked to pass conforming legislation, including addressing long-standing union issues.

Race to the Top should serve as a model for using performance incentives to drive innovation across a range of government agencies. For example, as noted, the federal government could make funding to universities partially contingent on how well universities commercialize their research. Likewise, the Department of Transportation could allocate funding from the Highway Trust Fund on the basis of how effectively states reduce traffic congestion.

Information technology transformation

One of the defining features of many of today’s innovations is their basis in information technologies — computers, software and telecommunications. As such, economic success depends upon accelerating digital transformation and the widespread use of IT in all sectors of the economy. The United States performs well when it comes to enterprise-level adoption of IT. However, the United States lags behind in the adoption of IT in other areas, particularly those confronted with chicken-and-egg conundrums.

One prominent example is the smart electric power grid. The smart grid is intended to be a new kind of network that will deliver power more efficiently and reliably than our existing power grid. The smart grid will facilitate the seamless integration of new technologies, including “smart” appliances that respond to dynamic price signals, plug-in hybrid electric vehicles, distributed generation (for example, residential solar panels) and energy storage solutions. However, U.S. electric utilities have been slow to embrace it, in part because as regulated monopolies they have little incentive to do so and in part because the public utility commissions that regulate them have been risk-averse. (It’s made worse by neo-Luddite citizen groups that oppose smart grids on completely fallacious grounds.) And, at least until the recent stimulus legislation, there was little help from government.

This suggests a key role for government: supporting “digital platforms.” Neoclassical economics ignores technology platforms. But throughout U.S. economic history, technology platforms have served as powerful launching pads for new industries and jobs. In the 1920s, there was no point in GE or RCA inventing a new electric appliance if people did not have electricity. In the 1950s, there was no point in Sears or Macy’s opening stores in suburban shopping malls if customers could not drive on highways to get to them. In the 1990s, there was no point in Amazon.com trying to sell books online if the World Wide Web didn’t exist. And in the early 2000s, there was no point for YouTube to host videos if people didn’t have broadband in their homes.

Today is no different. There is no point in creating an online application to let people manage their health information if that information consists of paper records. There is no point in creating a smart washing machine that turns itself on when electricity costs are low at night if the supportive electric grid isn’t smart as well. There is no point in creating mobile applications that require high transmission speeds if the 4G network is not deployed with adequate spectrum allocated to it. In fact, there are thousands of job-producing new products, services and business models ready to be launched once the needed digital platforms are in place.

There are at least six key digital platform technologies today. The first is broadband, which is a critical enabler of a host of new applications like telehealth and cloud computing. Yet, only about two-thirds of Americans subscribe to broadband, it is not universally deployed (about 6 percent of homes have no access other than satellite), and broadband speeds, while improving, can get much faster still. One reason so few Americans subscribe to broadband is that they don’t have a personal computer or don’t know how to use one. Taking steps to get more than 90 percent of households online would be a significant step forward in building a universal broadband economy.

Second, next-generation wireless communications promise to provide services with speeds that are 20 to 50 times faster than today’s 3G networks, enabling a mobility revolution to emerge. Yet, many places today cannot even get cell phone coverage, much less advanced data services, and it is not clear that the government will free up enough spectrum, especially spectrum now used by TV networks, for these data-hungry wireless applications.

Third, health IT gives patients and their caregivers an easily accessed, comprehensive view of the patient’s health information. But compared to some other nations, America lags far behind.

Fourth, intelligent transportation systems can bring real-time intelligence to travelers. Imagine that you could get real-time, in-vehicle traffic information that dynamically reroutes your navigation route based on information such as current road conditions (e.g., avoid icy spots or that traffic accident that just occurred moments ago and is backing up the interstate).

Fifth, a smart electric grid could sense the location of power outages; charge customers based on time-of-day use; and enable the use of new technologies like plug-in hybrid electric vehicles, distributed generation and energy storage solutions.

Sixth, contactless mobile payments can let consumers use their cell phone to pay a taxi fare, check in and out of a parking garage, present a boarding pass at the airport, or serve as a hotel room “key.”

Without government help to catalyze deployment of these platforms, we will not see the progress that is possible. In fact, as noted previously, a key reason why some nations are ahead of us in deploying these platforms is that foreign governments have engaged in smart partnerships to help the private sector build the platforms, in part by using a combination of tax incentives [and] smart, but limited, regulations that drive change and having the government act as a lead purchaser. The U.S. federal government should do the same.