Innovation Is Not Enough | Opinion

The Biden administration's proposed subsidies for R&D won't by themselves do much to improve American competitiveness. A suggested $50 billion funding boost for the National Science Foundation spread over several years represents roughly a tenth of what U.S. corporations spend on R&D each year. Meanwhile, Biden's proposed corporate tax hike will cut corporate R&D budgets, shifting R&D away from the private sector and toward universities and national laboratories.

The private sector produces the overwhelming majority of new concepts and, more critically, turns them into added value. Private companies obtained 85 percent of all U.S. patents in 2016, and individuals comprised an additional 9 percent. Universities, by contrast, accounted for only 4 percent of the total, and government laboratories just 1 percent. The Biden plan would drain resources from the private sector, which is the main source of practical innovation.

But patents by themselves don't improve productivity or strengthen our defense. Innovations that turn into new products, new industries or better weapons require private companies to turn research results into tangible products. Academic research won't do the U.S. economy much good if offshore manufacturers are the first to exploit the ideas that first emerge from university labs.

What made the U.S. economy the wonder of the world during the Digital Revolution was our ability to rapidly move the results of innovation into the marketplace. We not only conceived, but also manufactured, the key technologies of the modern age: computers, semiconductor chips, lasers, imagers, displays, data-storage devices and software. That requires the right kind of public-private partnerships, in addition to just publicly funded research.

Our technology industries have enormous gaps. Supply chains in critical technologies are broken—and, in some cases, nonexistent. For example, the Biden plan emphasizes electric vehicles, but to make electric batteries, we require chemical products that can't be sourced domestically.

We have been losing our competitive edge in high-tech manufacturing for decades. In constant year-2000 dollars, our trade balance in high-tech products sank from a surplus of $32 billion in 1997 to a deficit of $200 billion in the 12 months through February 2021.

This didn't happen because other countries replaced us as innovators of unique new product concepts. The U.S. is still home to the best research universities and laboratories, and held 3.1 million patents as of 2018, compared to 2.4 million in China and 2.1 million in Japan.

What we have neglected is the capacity to turn innovations into mass-market products by efficiently moving new ideas into the global marketplace. At the cusp of the Digital Age, this was embodied in the internal integration of big companies that supported research laboratories, such as Bell Labs, IBM Research and RCA Labs.

The great corporate laboratories generated innovations that the product divisions of those companies then commercialized. These innovations required the development of new manufacturing technologies, as well as an integrated corporate model that linked innovation to production.

Every key product of the Digital Age began with some form of government funding, usually from the Defense Advanced Research Products Agency (DARPA). But all of these products came to the marketplace with private capital, through the collaboration of scientists, engineers and production technologists.

The United States has an opportunity to revive high-tech manufacturing. The arguments for offshoring are now less compelling than ever.

Two decades ago, cheap Asian labor provided an argument for offshoring. Wage differentials today are shrinking. More importantly, high-tech manufacturing is so automated today that labor accounts for a small percentage of the total cost of many products, such that labor costs have little impact on competitiveness. Domestic manufacturing can be cost-effective with the right level of technology investment.

Today's competitive edge depends less on labor than on manufacturing flexibility to address rapidly changing product requirements. Labor costs don't dictate manufacturing success. Germany continues to run a large manufacturing trade surplus. In 2019, German auto workers earned an average of 50 Euros (about $60) an hour, almost twice the average pay of their U.S. counterparts.

In manufacturing industries with high potential, such as nanotechnology, pharmaceuticals, solar energy and semiconductor devices, product innovation cannot be separated from manufacturing. Successful products are manufactured at low cost because design and production engineers work together from the initial concept through tooling the production process.

The talent to create innovations ultimately follows the production facility. Industries that innovate successfully link innovation at the R&D level with ultimate product design and production. Rebuilding production capacity and supply chains is the key to maintaining our competitive advantage.

The big corporate research labs are gone, but some companies are increasing their research budgets, with resulting gains in performance. Companies such as Corning and Applied Materials have built and maintained industry leadership by linking their innovation centers closely to the business units responsible for commercialization.

Increased funding for university research and national laboratories is praiseworthy, but ultimately insufficient. Proper incentives for private R&D and domestic capital investment are the keys to restoring American high-tech industry. This is easier to do with tax credits than with direct subsidies, although the DARPA model of selective subsidies proved effective in the past.

The U.S. has demonstrated a remarkable capacity to turn ideas into mass production when the right economic incentives are in place. We need to dramatically increase national awareness of, and support for, advanced manufacturing. We need to make capital available to create advanced manufacturing facilities. We also need to foster educational programs that emphasize manufacturing technologies.

And finally, we must ensure that the government-funded laboratories are linked to industry, in order to identify technologies that win backing from private capital and turn those technologies into products with commercial value.

Henry Kressel is a technologist, inventor and long-term Warburg Pincus private equity investor. His most recent book (with Norman Winarsky) is If You Really Want to Change the World: A Guide to Creating and Sustaining Breakthrough Ventures (Harvard Business Review Press, 2015). David P. Goldman is deputy editor of Asia Times and the author of You Will Be Assimilated: China's Plan to Sino-Form the World.

The views expressed in this article are the writers' own.