Is U.S. Losing the Innovation Arms Race?

Tom Melcher saw it coming. Even back in the early 1980s, when he was an undergraduate at Yale University studying Mandarin Chinese, Melcher understood the critical role that China would someday play in the U.S.’s economic future.

He observed it firsthand while helping to found IBM Corp.’s early efforts in Beijing in the mid-1980s. And he thought about it often throughout his time at Harvard Business School and during his stints as a principal executive at five different Silicon Valley start-ups. But it wasn’t until last year that Melcher made a move he had considered for more than two decades.

In July 2004, Melcher moved to Beijing with his wife and two daughters and began investing in emerging Chinese companies.

“We feel it’s part of our jobs as parents to prepare our daughters and give them opportunities,” Melcher explains. “They really need to learn Chinese.” Asked why, he laughs. “They ask us that all the time. It seems obvious. If you fast-forward 10 years, or maybe 20 years, it is absolutely clear that the only other superpower in the world will be China, and it will be a world force in the way that the U.S. is now.”

What Melcher is acting on is the growing fear in the U.S. today that the twin forces of outsourcing and globalization are working in tandem to unseat the U.S. from its lofty position as the world’s only economic superpower. And in the frenzied fight to keep the U.S. on top during this perceived global leveling, innovation is the weapon in our economic arsenal most commonly being called upon to save us from an uncertain future.

It is a long-held tenet of entrepreneurialism in the U.S. that no matter what global economic challenges the world can dish out, we can innovate our way out of them. Time and again, American innovation has created new markets, built economic value and kept our citizens gainfully employed. The telephone, the semiconductor, the Internet. But what happens when innovation itself is being outsourced? “Where innovation happens matters,” says Thomas Friedman, author of The World Is Flat (Farrar, Straus & Giroux, 2005), a 500-page tome on the effects of globalization. “The flat world means that you don’t have to emigrate to innovate, and when you can innovate without having to emigrate, you don’t have to come to the U.S.”

The Council on Competitiveness, a lobbying group composed of industry and academic leaders, is so concerned about the future of innovation in the U.S. that it issued a 68-page “call-to-action” report in December 2004, urging policy-makers, universities and industry to “optimize our entire society for innovation.”

There is reason to worry. In 2005, the National Science Foundation saw its R&D budget cut for the first time since 1996. And the proposed 2006 federal budget includes a meager increase of one-tenth of a percent in R&D funding, most of it earmarked for defense and homeland security.

Meanwhile, fears about the nation’s faltering educational system abound. In February, Bill Gates told an audience at the National Education Summit on High Schools in Washington, D.C., that the country’s schools were obsolete. “By obsolete, I mean that our high schools—even when they’re working exactly as designed—cannot teach our kids what they need to know today,” Gates said. And U.S. citizens pursuing graduate degrees in science and engineering declined 10 percent between 1994 and 2001, while foreign-born students upped their enrollment by 25 percent, according to the NSF.

Perhaps that’s why at a biotech conference in late 2003, George Whitesides, the eminent Harvard chemist and nanotechnology researcher, answered a question about the U.S.’s prospects by noting he has three “very nice but unemployable” sons. “The future is going to be much better for India than Indianapolis,” he said.

That may be a tad drastic. And while statistics indicate that the U.S. needs to till the soil from which innovation grows, historical evidence suggests that downturns of this nature are cyclical, normal and addressable.

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