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<font size="6"><strong></strong></font><font size="6"><strong><font size="4">Translating innovation into US growth: An advanced-industries perspective </font></strong></font><font size="4"><br /><br /></font><font size="5"><strong><font size="3">The United States faces a future in which the elements of economicleadership are moving abroad. Reversing these trends will require the privateand public sectors to collaborate.</font></strong></font>MAY 2011 ? James Manyika, Daniel Pacthod, and Michael Park <br /><a href="https://www.mckinseyquarterly.com/Translating_innovation_into_US_growth_An_advanced-industries_perspective_2810" target="_blank">https://www.mckinseyquarterly.com/Translating_innovation_into_US_growth_An_advanced-industries_perspective_2810</a><br /> <br />Is America losing its innovation edge? For decades,the country has debated this question in the halls of Washington, on thenightly news, and in corporate boardrooms. Pundits have looked abroad for signs—fromthe Soviets during the Cold War to the Japanese in the late 1980s to the AsianTigers<a href="https://www.mckinseyquarterly.com/Translating_innovation_into_US_growth_An_advanced-industries_perspective_2810#footnote1" target="_blank"><sup>1</sup></a>in the early 2000s—that the United States was losing its economic advantage.Pessimists point to startling statistics, such as the rise in the number ofpatents filed by foreign inventors or the growing corps of engineers graduatingoverseas.<br />These statistics are indeed alarming. Yet despite the historical challenges,the United States has remained the home of innovation. From the Internet tomainframe servers to pharmaceuticals, major innovations are still “Made in theUSA.”<br />So what is the disconnect? Is America’s innovation advantage simply toolarge to overcome? Are numbers of patents and engineers no longer relevantmetrics in a digital world? Perhaps. However, we think that looking solely atinnovation and leadership in basic research is far too narrow. The key questionis whether the United States has been losing its ability to translateinnovation into economic leadership. <br />To answer this question, building on recent McKinsey Global Institute (MGI)research on productivity and on the role of US multinationals, we conducted aseries of interviews with CEOs of advanced industrial companies. These CEOs,who lead R&D- and engineering-intensive companies ranging from automobileand energy-equipment manufacturers to aerospace and defense players, stand onthe front lines of this debate. From our conversations and original research,we see real cause for alarm.<br />Innovation may create profits and headlines, but it is only part of theeconomic engine. Intel’s Andy Grove writes that the United States has“misplaced faith in the power of start-ups.” German research labs may havecreated the MP3, but it was the scale-up capabilities of American technologyfirms that took this innovation and unlocked its value, from Apple’s iPod tofile sharing to digital-media vendors like the iTunes store, and beyond. Thisability to take basic innovation, deliver it at scale, and refine it withsecond- and third-order innovations plays a critical role in driving growth andjobs. To do all this, a country must be at the center of cutting-edge technologies,market demand, talent, and entrepreneurial spirit. <br />We see warning signs regarding each of these elements. The problems go wellbeyond jobs or patents—to the heart of US economic leadership. We do not haveall the answers, but we are convinced that a course correction is necessary.Incremental steps by the public sector, through one-off tax credits andpiecemeal government programs, won’t be sufficient. Neither will theshort-term, quarter-to-quarter mentality in America’s corporate boardrooms. A nationalcommitment and strategy are required.<br /><font size="2"><strong>What are the facts?</strong></font>Is the United States truly behind? From one angle, it’s hard to see anythingbut positives. The country has a business culture and a legal and capitalmarket system that encourage and reward risk taking and entrepreneurship. Itcontinues to attract top students and teachers from around the globe andremains the dominant investor in research and development, with total spendingmore than that of the next four nations—Japan, China, Germany, and SouthKorea—combined.<br />There are clear warning signs, however, across the facets of economicleadership.<br /><font size="2"><strong>Cutting-edge technology</strong></font>In leading industrial technologies—such as advanced batteries, high-speedrail, hybrid automobiles, solar modules, offshore wind turbines, and machinetools—the United States finds itself competing against or even catching up withforeign companies and engineers. Historically, the country has been theundisputed leader of next-generation technology, from semiconductors to IT tospace. It pretty much <em>owned</em> these sectors. But today, even in anindustry such as space, the United States finds itself relying on Japan,Russia, and Western Europe to launch its satellites. This issue goes beyond thewell-publicized discussion around US jobs. It is at the heart of economicleadership. Without preeminence in cutting-edge technology (and the business,communications, and physical infrastructure to support it), the jobs questionis moot.<br /><font size="2"><strong>Demand</strong></font>The composition of global demand has changed dramatically over the past fewdecades. For the first time in recent history, more than 50 percent of theglobal middle class lives outside North America. Meanwhile, manynext-generation engineered products are in high demand not by US or Europeancustomers but by those in Asia, Latin America, and the Middle East. Fromairplanes to offshore wind turbines to nuclear technology, these foreigncustomers are creating markets and dictating preferences, often withlocal-content requirements. US companies can no longer build products just forthe US market and expect to export them readily without modification.<br /><font size="2"><strong>Talent</strong></font> artly as a result of the declining prestige of the US engineeringprofession and the lagging effectiveness of the education system, scientifictalent is building outside the United States. Almost one-third of USmanufacturing companies responding to a recent survey<a href="https://www.mckinseyquarterly.com/Translating_innovation_into_US_growth_An_advanced-industries_perspective_2810#footnote2" target="_blank"><sup>2</sup></a>say they are suffering from some level of skill shortage. Foreign labs arebecoming more ambitious, leading cutting-edge research that used to be theexclusive domain of US companies and universities.<br /><font size="2"><strong>Entrepreneurial spirit</strong></font>Entrepreneurship is the magic that binds all these elements, yet we see anincreasing risk aversion toward new ventures in the United States. Large UScorporations, the innovators of the previous generation, seem most affected.Part but not all of this behavior results from uncertainty about public policyand regulation, but some of it reflects past successes and a failure to thinkin the long term. Many of America’s leading advanced industrial companiesreport returns on capital well above 20 to 30 percent or more—the result ofdecades of productivity and ingenuity but also of a depreciated existing assetbase. Too often, decisions to finance and push into new product areas or toenter new geographical markets die because companies fear to dilute these highreturns. Worse yet, to meet short-term earnings objectives, companies deferpromising but risky plans.<br /><font size="2"><strong>How should the United States respond?</strong></font> ublic policy, private-sector shortsightedness, off shored manufacturing,unfair foreign subsidies, or any combination of these can all be blamed for thewarning signs above. Whatever the cause, the United States faces a future inwhich the key elements of economic leadership are moving abroad. Action isimperative. Revitalizing US innovation and growth will require a nationalcommitment in which the public and private sectors work together. Our researchsuggests a number of steps to start changing the trends.<br /><em>1. Clear the way for the cutting-edge industrial technologies of thefuture</em><br />To meet this goal, policy makers must ramp up public-sector procurementtargets and set standards for next-generation technologies. Examples of thenecessary policies include (1) clean power, through national standards forrenewable energy; (2) transport, through mandated improvements in the fuelefficiency of automobiles; and (3) advanced composites, through Department ofDefense procurement and airplane-efficiency standards. <br />The private sector will have to ease its paranoia about intellectualproperty and collaboration. US leadership in semiconductors was in part enabledby projects such as Sematech, an industry consortium to share R&D. Otheradvanced industries have not followed suit; the number of such partnershipsoutside the IT sector has stagnated.<br /><em>2. Rebuild infrastructure</em><br /> art of this national strategy calls for infrastructure upgrades to supportUS production and engineering and to cut through well-meaning but burdensomered tape and regulations that add costs and time to construction. The necessaryactions include the following:<br /><ul><li>Fast track the approval process and standards setting for selected high-priority technology areas (for example, accelerated LED-bulb-technology review, clarification of unconventional gas and waste water standards).<br /></li><li>Create manufacturing-development zones with fast-track site approval.<br /></li><li>Develop investment incentives—for example, by allowing the tax-free repatriation of capital to finance US investment, thus tying R&D tax credits to US production.<br /></li><li>Emphasize efforts to build “smart infrastructure,” such as fiber-optic cable.<br /></li></ul>To help public policy coalesce and support these initiatives forinfrastructure and production upgrades, private-sector leaders must worktogether to communicate a comprehensive social value proposition—for example,energy efficiency, reduced pollution, and an improved traffic flow—not justjobs.<br /><em>3. Attract and retain talent</em><br />After foreign students study at US universities, the country pushes themaway with restrictive H1-B<a href="https://www.mckinseyquarterly.com/Translating_innovation_into_US_growth_An_advanced-industries_perspective_2810#footnote3" target="_blank"><sup>3</sup></a>policies. Later they work for (or start up) future competitors while UScompanies struggle with an aging engineering workforce. The necessary moves includethe following:<br /><ul><li>Streamline green card application processes and increase the number of H1-B visas—now capped at 65,000 but in 2003 as high as 195,000.<br /></li><li>Expand efforts such as the US Department of Labor’s High Growth Job Training Initiative, which targets 14 key sectors for investments in workforce development.<a href="https://www.mckinseyquarterly.com/Translating_innovation_into_US_growth_An_advanced-industries_perspective_2810#footnote4" target="_blank"><sup>4</sup></a> <br /></li><li>Renew private-sector efforts to train, develop, and retain current engineers.<br /></li></ul><em>4. Reenergize the entrepreneurial spirit in large US companies</em><br />The rapid expansion of small, inventive companies that grow up to becomelarge ones innovating at scale is one of the hallmarks of US leadership. Thecountry should continue to encourage this model, and more executives of largecompanies should embrace it. Many of our largest, most successful industrialclients are far too wary of long-term investments, which they often measurewith short-term financial-performance metrics. Executives must reshape WallStreet’s quarter-to-quarter mentality and help these companies make the samekinds of bold but prudent decisions that made them great in the past.<br />We are confident that the United States can realize itsinnovation and growth potential. Its natural advantages are undeniable. Butother countries are building up cutting-edge technology, demand, talent, andentrepreneurism, while the United States seems to be in retreat. The public andprivate sectors must work together to reverse that trend. |
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