Why Do We Have to "Innovate"?

February 14, 2011 Dennis D. McDonald

In Innovation Policy + Deficit Reduction = Politics As Usual? I described some of the policy debates about the appropriate role of the Federal government in promoting the types of innovation that can eventually simulate the U.S. economy and U.S. employment. There are many different practical, political, and philosophical issues involved in these debates that seem to boil down to basic and longstanding disagreements about the respective roles of the Federal government and the private sector.

We need these debates. We already see them playing out in discussions surrounding the proposed Federal budget where significant cutbacks in Federal energy R&D and other innovative programs are proposed.

You have to admit there there are some pretty serious issues at stake. One is the shifting balance of world economic power. With China now eclipsing Japan and on track to overtake the U.S. it is interesting to speculate on how much a national “innovation policy” can impact how quickly these shifts in economic power occur.

With that in mind I recently posed these two questions on Twitter:

Why should US firms invest in risky or innovative applied energy R&D projects if short term shareholder value is their primary goal?
Why should US firms invest in risky or innovative applied energy R&D projects if they can purchase technology invented by China or India?

I base these questions on several realities that I see operating here in the U.S.:

There is no guarantee that any given Federally-funded R&D project will generate guaranteed and definable benefits in any specific (e.g., 3-5 year) time frame.
There is no guarantee that private sector firms with their short term profit targets will make investments in high risk R&D projects that have no guarantee of short term shareholder benefits.

Despite my personal preference for private sector responsibility, I fear that we are between a rock and a hard place with respect to energy innovation. We’ve seen how dependence on cheap foreign oil has increased our vulnerability. Now I see the possibility of the same thing happening with technology, i.e., why should U.S. private sector firms voluntarily invest in high-risk technology development projects if a chance exists that they can buy technology developed elsewhere?

As I said, the issues are complex, political, and philosophical. There are no guarantees in R&D investment, whether these investments are managed by the Federal Government or the private sector. At the same time, our slow economic recovery increases the likelihood that the private sector will necessarily approach high risk technology development very cautiously. Either way, we appear to be vulnerable to a continued loss of control over important parts of our own economy.