Innovation Policies for the 21st Century

Patent Reform and Support for Regional Centers of Innovation Are Critical

Given alarming job losses, falling economic growth, and cascading housing foreclosures, no wonder U.S. policymakers are focusing on the immediate problems at hand. Stabilizing the housing and financial sectors, stimulating the wider economy, and ensuring a recovery focused on green job creation is fast becoming an integrated national mission, but the U.S. economy was in trouble long before the subprime mortgage crisis. Job growth has been weak and incomes have been stagnant or falling for most of the last decade. That’s why it’s essential for the incoming Obama administration to look beyond the immediate crisis and put the United States back onto a path of long-term progressive growth. And that will require a different set of interrelated policies—measures that move beyond federal economic pump priming and new credit creation.

For much of the postwar period, economic discourse focused on the internecine warfare between Keynesians and monetarists, yet cutting-edge economic thought increasingly is exemplified in “innovation economics,” whose simple principle is that new ideas, products, and processes are the key to unlocking broad-based economic growth. As Stanford University Professor Paul Romer puts it, “human history teaches us that economic growth springs from better recipes, not just from more cooking.”

Most countries in the world import their innovation by adopting technological developments from abroad. But the United States has always been on the technological frontier. Whether it is the automobile, airplanes, lasers, or the Internet, innovators in America have pushed the boundaries of ingenuity. Over the last few decades, however, other countries have begun to catch up—and in some measures are moving ahead. The United States, for example, now ranks only seventh among the industrialized democracies in the amount of gross domestic product devoted to research and development, falling most recently behind Japan and South Korea.

The main reason: Since the late 1960s federal government spending on research and development has declined as a share of both total R&D spending and GDP. This has contributed to an alarming decline in the number of researchers as a proportion of the labor force. Boosting government funding of basic R&D in a number of economically innovative ways must be part of the new administration’s economic stimulus program, as the Center for American Progress detailed in its November 2007 report “A National Innovation Agenda.” The latest volume of Science Progress, to be released on January 12 at our event “Enabling Economic Recovery Through Innovation,” contains two new reform initiatives grounded on two central principles: the right incentives must exist to ensure that inventors have a reason to innovate, and the right policy environment must be in place to encourage regional centers of innovation to flourish across the country. Let us consider each of these principles in turn.

Innovation is subject to a fundamental market failure. Put simply, its lifeblood—research and development—is costly while the end product may be relatively easy to replicate. This means that unless inventors can claim monopoly rights of production for a period of time, they will not be able to recover their up-front investment costs. The United States’ patent system was initiated by the founding fathers in Article 1, Section 8 of the U.S. Constitution, which states “Congress shall have the power…to promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

Congress has achieved this in different ways over the past two centuries, but the U.S. patent system is now stuck in the 20th century. Chief among the problems are the backlog of about 1 million patent applications; the poor quality of granted patents, which in turn lead to expensive and time-consuming court cases; and the emergence of so-called “patent trolls,” or investors who acquire the rights to certain inventions and then essentially hold that intellectual property for ransom when companies use them in their products and services.

Efforts fell short in the last Congress to reform the patent system. The incoming 111th Congress must conclude the process, but there are other changes that can be made which do not require legislation. President-elect Barack Obama must select a Patent and Trademark Office director with great organizational skills who will enhance the resources of examiners, increase transparency, and make better use of work sharing with other patent offices around the world. Patent applicants also have a responsibility to make the system work better by recommitting themselves to the highest and fairest standards as they craft their claims and defend their intellectual property. Finally, the courts should tread fairly but assertively into the legal frontier that remains unaddressed by the PTO and Congress.

Patentable products and services, however, require more than legal protection to boost economic growth. Innovative ideas also need good soil in which to germinate and grow. In the United States, certain regions are home to many of the world’s best inventions. The cluster of high-tech companies around Stanford University in Silicon Valley and biotechnology companies around the Massachusetts Institute of Technology are just two of the more eye-catching examples—clusters that evolved over time due to the confluence of academic, industrial, and financial specialization. Other clusters, such as Research Park Triangle in North Carolina, married innovative specialization with thoughtful government policymaking to create new ideas and new jobs.

To get the most from these centers, and to encourage new ones to emerge, universities and companies more than ever today require the right mix of government policies. The forthcoming edition of Science Progress and this website will include suggestions of how to get this right, including a tax system and regulatory structure that encourages risk taking and rewards R&D activity; a National Innovation Fund that allocates resources where they are needed; metrics by which to ensure the right local infrastructure is in place; and lessons from other governments that value service sector innovation as well as more traditional scientific R&D.

The Obama administration and the new Congress have a unique opportunity to craft a new set of innovative economic policies that encourage immediate and long-term sustainable economic growth. With the right stabilization, stimulus, and recovery policies, the United States can pull itself out of the current recession and restore science, technology, and innovation as the centerpieces of the U.S. economy. Reforms that reward and encourage invention are critical to that mission.