美國創新之分析

國

立

交

通

大

學

科技管理研究所

碩

士

論

文

美國創新之分析

An Analysis of U.S. Innovation

研 究 生：Joshua Richards

指導教授：虞孝成 教授

美國創新之分析

An Analysis of US innovation

研 究 生：李佳士 Student：Joshua Richards

指導教授：虞孝成 Advisor：Hsiao-Cheng Yu

國 立 交 通 大 學

科技管理研究所

碩 士 論 文

Submitted to Institute of Management of Technology College of Management

National Chiao Tung University in partial Fulfillment of the Requirements

for the Degree of

Master of Business Administration in

Management of Technology June 2009

Hsinchu, Taiwan, Republic of China

The Innovation Transformation: An Analysis of US

innovation

Student：Joshua Richards Advisor：Dr. Hsiao-Cheng

Yu

Institute of Management of Technology

National Chiao-Tung University

Abstract

In a global market, how does policy influence innovation on a national level? Machiavelli considered this question in his deliberations on the creation of a new order:

―There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new order. […] Whenever the enemies have the ability to attack the innovator they do so with the passion of partisans, while the others defend him sluggishly, so that the innovator and his party alike are vulnerable.‖ Nicolo

Machiavelli, The Prince

As globalization continues to expand our economic borders, what role does policy legislation in a national context play in fostering innovation, and what impact does that innovation policy have on that country‘s economy? In an increasingly borderless world where the transfer of knowledge and information is growing rapidly, what is the logic behind government investment in knowledge appropriation if that knowledge is going to vanish into global-related processes? The United States is a prime example for studying the impact of innovation, and will serve as the focus of this study. As a country of immigrants, the United States has drawn ideas from all over the world through the diversity of its population, and those ideas have given rise to innovations that have changed the world. Innovation is the development of new ideas, products or processes. The factors that influence and promote innovation are great, but we will limit our focus to the policies related to innovation, their effects on the development of innovation, and the impact of those policies on the economy.

Table of Contents

Abstract ... i

Table of Contents ... ii

Table of Charts ... iii

1. Introduction ... 1

1.1

Definitions of Innovation ... 1

1.2

Motivation ... 4

1.3

Objectives ... 7

2

Related Literature ... 9

2.1

Discussion of innovation measurements ... 9

2.2

Innovation Indices ... 15

2.2.1

Requirements for Measurement Tools ... 15

2.2.2

Methods of Measurement ... 20

3

Innovation measurements in the US ... 37

3.1

US economy vs. other countries ... 40

3.2

US technology vs. other countries ... 44

3.3. US education vs. other countries... 51

3.4

US tax & finance vs. other countries ... 55

4

Findings on US innovation ... 61

4.1

Strengths ... 61

4.2

Weaknesses ... 65

5. Recommendations ... 68

6. Conclusions ... 75

NOTES ... 79

REFERENCES ... 102

Table of Charts

Chart 1 08-09 Global Competativeness Index………..33

Chart 2 2008 Adult Literacy Rate……….33

Chart 3 09 Global Innovation Index……….33

1. Introduction

1.1

Definitions of Innovation

There is nothing more fundamental to the advancement of humanity than the inherent human desire to innovate. From the very first stone tools on earth and the discovery of fire, man has been developing new ways to improve his way of life. The human experience is defined by the drive to develop new ideas, explore boundaries, and test the limits of the universe. Human innovation has been a great constant throughout recorded history, visible in every society throughout time. The innovators in every civilization have all shared the same desire, the passion for discovery. And while it is this characteristic that unites our collective differences, innovation is also the driving force behind every major change in our world.

Innovation is understood primarily as the effective introduction of new techniques, methods or practices, or new products and services. Because of its dynamic nature and far-reaching application, innovation influences a broad range of fields, including technology, social systems, economic development, commerce, and policy construction. As a natural change agent, innovation is ultimately felt in every sector of society.

Joseph Schumpeter (1934) described his economic theory of creative

destruction, identifying innovation as the driving force behind economic development. His observations of capitalist societies found that long-term economic growth was generated by the creation of the new, and by the displacement of the old. In similar studies, statistical comparisons of economic performance among countries have shown that the intensity of national innovative activity is correlated with higher rates of standards of living and productivity growth (Furman et al. 2002, p.34, 899-933).

Through the course of national development, change becomes a critical element in strategic progress. As nations achieve higher levels of gross domestic product (GDP)4 per capita, the main source of this change becomes innovation (Porter et al. 2001). Change is the natural evolution of nations as they transition from agricultural economies to manufacturing and eventually to information-based economies. The continual evolution of national structures creates an environment of perpetual change, forcing nations to adapt.

The impact of innovation on society from each new development varies greatly in significance, ranging from incremental improvements in a particular field to discoveries that change the entire world. The developments that bring about these monumental shifts in thought can be referred to as disruptive technologies, a reference to the dramatic change their introduction creates. Some of these disruptive

technologies include computers, the Internet, the Manhattan Project, global positioning satellites, and many others. The changes brought about by these

innovations disrupt our way of life, challenging what we understand and altering the way we operate. These transitions are sudden and powerful, crashing through barriers with the tremendous fury of creative destruction, and those who are unable to adapt are left behind. When science is ready for discovery, change is inevitable, and those who prosper are the civilizations and leaders who embrace this change.

Recognizing innovation as the driving force behind this change, many

countries promote the development of new ideas as a method of national competition. By remaining at the forefront of discovery, nations are securing their position of power by shaping the direction of innovative change. As technology evolves, the rate of change increases, and with the spreading adoption of the internet, new ideas can be shared globally within instants. This global exchange of information is creating a

universal society of creativity where the market environment is continuously

redefined and product lifecycles are increasingly shortened. The speed at which ideas are adopted and improved upon has created increased pressure for national

governments to remain competitive in the field of innovation. Many governments are focusing increasingly on methods to foster innovation.

1.2

Motivation

The United States, a country which has benefited from the concentration of ideas from its many diverse people groups, is a strong example of national innovation. With a recent score of 5.74 in the Global Competitiveness Rankings, the United States has consistently ranked first among other countries (Chart 1). This strength of

competition relates directly to the power of innovation, a field in which the United States has consistently ranked at the top. Leading the world in the field of innovation for over two centuries, the United States currently places second in world innovation rankings according to the International Innovation Index6 and in first place on the Global Innovation Index7.

Beginning in 1776, the U.S. set a precedent for innovative thinking and has been responsible over the last two centuries for many of the most significant world discoveries and inventions. Free thinkers seeking opportunity and freedom helped create the United States, laying a social foundation for independent thought.

America‘s Founding Fathers, among them Benjamin Franklin and Thomas Jefferson, helped lay this foundation, developing innovations in technology, electricity,

governance and philosophy. From those beginnings, America has given birth to a host of world-changing innovations, including the airplane, the nuclear bomb, the

assembly line, the light bulb and the telephone, which have shaped and guided the development of society. As a current world leader in the field of innovation, the United States will be deeply influenced in its future direction by the shift occurring through globalization, by which national economies are rewarded through innovation. Developing policy to accommodate these changes will be essential to the continued success of this nation. In order to accomplish this, legislatures will need to understand fully the nature of the impact of policy on a nation‘s innovation initiatives.

By focusing heavily on entrepreneurship and innovation, the United States has developed the largest and most technologically powerful economy in the world, with a per capita GDP of $48,000 (CIA World FactBook, 2009). As a nation, the United States has adopted a predominantly market-oriented economy where private

individuals and industry make most of the decisions. U.S. business firms also enjoy greater independence than their Western European and Japanese counterparts. Decisions relating to capital plant expansion, employee retention and product

development lie predominantly in the hands of private industry. Despite this freedom, American firms face higher social and political barriers of entry into their rivals‘ home markets than foreign firms face in entering the American market. While their advantage has narrowed since the end of World War II, U.S. firms continue to remain at the forefront in technological advances, particularly in the fields of medicine, aerospace, computers, and military equipment.

This leadership, however, is not without its challenges. Rising competition from India, China, Taiwan, Korea and Japan is threatening to disrupt America‘s position of power. In recent years, the United States has also become involved in a series of financially-draining events. Following the September 11, 2001 attacks on the World Trade Center, the United States began a campaign to combat terrorist

organizations, primarily in the Middle East. Beginning in 2003, the US-led coalition and subsequent occupation of Iraq has required major shifts in national resources to the military. Between 2005 and the first half of 2008, soaring oil prices threatened inflation and unemployment, as higher gasoline prices limited personal spending. Presently, imported oil accounts for approximately two-thirds of U.S. consumption, resulting in a dependence on foreign production.

Despite being the global leader in innovation, the United States will clearly have pressing concerns to address in the future. It is evident that innovation alone is no longer a guarantee of prosperity. U.S. policy makers have recognized many of the faults in the current economic system and have made steps to address them. In an effort to stabilize financial markets, the U.S. Congress established a $700 billion Troubled Asset Relief Program (TARP) in October of 2008. A portion of these funds were used to purchase equity in U.S. banks and other industrial corporations. In a further effort to help the economy recover, the U.S. Congress passed a bill in January of 2009, providing an additional $787 billion fiscal stimulus package to create jobs (CIA World FactBook, 2009).

National leaders anticipate a variety of pressing concerns for future generations, including the weakened stability of the U.S. economic infrastructure, rapidly rising medical and pension costs, considerable trade and budget deficits, and the stagnation of household income in lower economic groups. In 2007, the

merchandise trade deficit reached a record $847 billion but declined to $810 billion in 2008, as a falling exchange rate in the dollar against most major currencies

discouraged U.S. imports, making U.S. exports more competitive abroad (CIA World FactBook, 2009). By mid 2008, the global economic downturn, sub-prime mortgage crisis, investment bank failures, and tight credit had pushed the United States into a recession.

1.3

Objectives

The main source of a nation‘s strength in regard to shaping the direction of innovation lies primarily in its policy. Legislation forms the foundation for every national initiative. The profound impact of national policy is manifested both directly and indirectly (Marklund, Vonortas and Wessner, 2009). The strength of a nation is deeply influenced by its wealth and natural resources, but that strength lies first in the foresight of its leaders. Leadership revolves around decisions, changing the order of things. As Machiavelli5 observed, this is a dangerous, difficult and uncertain

enterprise, which requires, in the words of Carly Fiorina (former CEO of Hewlett Packard), the ―energy of change warriors,‖ who are able to overcome fear and resistance to change. At its core, leadership is about instilling hope and passion, enabling others to see and lay hold of their own possibilities, in order to bring about positive and lasting change. The policies adopted by a nation shape the course of innovative development and ultimately determine the nation‘s ability to adapt to the changing world.

While the virtues of government intervention can be debated, as noted by Ronald Reagan in his declaration that ―Government is not a solution to our problem, government is the problem,‖ it can nonetheless be agreed that government is

responsible for leadership in providing an environment where success is possible. The policy decisions of tomorrow will reflect the wisdom and foresight of today‘s leaders, and the implications of these decisions will shape the course of the United States in the future. Assuming the law of creative destruction remains valid with respect to the role of innovation within an economy, today‘s leaders will need to examine the impact and effectiveness of innovation policy within the contexts of a new globalized environment.

Effective innovation policies have a significant impact on national work conditions and wealth generation, as innovation is essential to job creation and economic growth. Globalization is simultaneously creating new opportunities for innovation and increasing pressure for competition in developing national innovative capabilities. The rapidly-changing global environment is altering the dynamics of policy in relation to investments in innovation. Policy makers will need to adapt to the constantly-shifting environment, reshaping their understanding of traditional policy challenges. The impact of globalization on innovation requires a comprehensive renewal of policy development, and the creation of new policy measures to foster innovation is critical for wealth generation in an ever-increasing market of global competition.

This paper will explore the core nature of innovation, the role of government in forming policy, the impact of policy on innovation and the economy, the benefits from innovation, and the implications within the United States with respect to the globalized market. The main focus of this research effort is to assess and analyze the innovation policies of the United States, highlighting the specific strengths,

weaknesses and effectiveness of those policies in the specific economic environment in which the United States operates. It is hoped that the observations of national trends will contribute to an understanding of national innovation policy and its relevance within the context of a globalized environment.

2 Related Literature

2.1 Discussion of innovation measurements

To understand the impact of innovation policy, the true nature of innovation itself must be clearly identified. The study of innovation has been evaluated within a variety of contexts, including technology, social systems, economic development, commerce, and policy construction. This broad variety of contexts provides a wide range of approaches for defining innovation (Fagerberg et al. 2004).

Throughout these broad perspectives on innovation, a consistent theme is evident. Innovation is predominantly understood as the effective introduction of new techniques, new methods or practices, or new products and services. Examples of these innovations include new techniques in value investing, new methods of

construction using interchangeable parts, new business practices such as the assembly line, new products such as the personal computer, and new services such as the internet. These innovations were novel ideas which changed the order of operation in their respective contexts.

The introduction of a new good is, by definition, the development of a good which is unfamiliar to customers. While many of these innovations are dependent on new scientific discoveries, innovation can at times be the original application of an existing entity. This is often found in the pharmaceutical world where existing drugs are found to have new uses.

The introduction of a new method of production can exist in a new commercial treatment of a commodity. The search for new supply sources of raw materials or half-manufactured goods can also be innovative, irrespective of whether

this source previously existed. Innovation can also be found in the reorganization of an industry. Schumpeter‘s focus on innovation is evident in Neo-Schumpeterian economics, developed by such scholars as Christopher Freeman (1982) and Giovanni Dosi (1982). Innovation is also studied by economists in other contexts, including Paul Romer‘s New Growth Theory and the theories of entrepreneurship.

The sources of innovation or the catalysts that drive innovative thought are difficult to reproduce but they can be classified according to several categories. In the linear model of innovation, the source of innovation is often considered to be the manufacturer. Individuals or businesses develop new ideas to improve the sale of their products. More recently recognized as a valid source of innovation is end-user

innovation. Individuals or businesses develop an innovation for their own personal needs to be used in-house because of a lack of existing products to meet their needs. A prime example of end-user innovation was the development of assembly line

production by Henry Ford. In Sources of Innovation, Eric von Hippel (1988) identifies end-user innovation as the most significant and critical source.

Regarding user innovation, a considerable level of innovation occurs through the direct use of related technologies by individuals implementing natural process improvement methods throughout the course of their routine activities. This can be seen in the development of interchangeable parts. Eli Terry, a clock maker in the 1700s, began using standard parts that were interchangeable to facilitate his operation. User-innovators like Terry sometimes become entrepreneurs, when they recognizer the value of their innovation. A recent trend in the market has been the free exchange of innovations using methods such as open source technology. This trend is born out of networks of like-minded individuals who are able to use the free exchange of innovative developments to further develop technologies (Tuomi, 2002)

In the business environment, considerable attention is focused on formal research in the pursuit of breakthrough innovations or disruptive technologies. These innovations are by far the most publicized and recognized accomplishments, but innovations may also be developed through more indirect routes, including the exchange and integration of professional experience as well as on-the-job

modifications of practice. The more radical and revolutionary innovations emerge predominantly from traditional direct research and development. Incremental innovations more often emerge from practice, but there are numerous exceptions to each of these trends.

Within an organization, innovation programs are greatly affected by organizational goals and objectives, company business plans, and corporate positioning relative to market competitiveness. Google is an excellent example of innovation through this means. The corporate environment at Google embraces innovative ideas, methods and processes. Google offers creative outlets to its

employees in the form of activities and services, and through this creative process, has introduced numerous innovations in online business, including the development of a global digital compilation from satellite photos of the earth. This dedication to innovation is often capital intensive, requiring significant percentages of corporate turnover.

The pursuit of a successful innovation requires considerable dedication, consuming tremendous resources. The large cost of experimentation associated with innovative development can be financially draining, creating a barrier of entry for many cash-poor organizations. The tremendous need for funding experimentation in the pursuit of innovation is underlined in Stefan Thomke‘s book, Experimentation Matters. He charges that the ability to innovate is dependent on experimentation

(Thomke, 2003), creating intense funding requirements. Investment in innovative improvements to established products, processes and services will typically average four percent within a company, but may vary throughout industries and can range from as low as one half percent of turnover to well over twenty percent, depending on the rate of change within the individual corporate markets.

While many organizations endeavor to be innovative, the intangible aspect of creativity creates an imbalanced return on investment with respect to innovative efforts. Financial resources alone are no guarantor of success, and the possibility of failure is great. The wide range in percentage of corporate turnover dedicated to innovative efforts illustrates the varied level of importance placed on innovation with respect to financial resources, but fails to address the diverse cultures impacting the organization.

As a result, the success rate of innovative investment varies greatly. A great majority of innovation projects result in failure, contributing nothing to the

organizational goals. Many organizations fund a great number of innovation projects while expecting only a small percentage of them to materialize into commercial assets. And there is always the possibility that none of the innovation projects will ever be successful. As a result, the ability to recognize the commercial potential in every innovation is critical to a corporation‘s success. A particular example of this failure is Xerox Corporation, which invented the computer mouse and the graphical user interface, but failed to recognize the commercial potential or capitalize off of their innovation.

The debate between supply and demand origins of innovation has also been explored extensively. Supply-pushed innovations are based on the development of new technological possibilities, while demand-led innovations are based on social

needs and market requirements. The co-dependent nature of both supply and demand creates a difficulty in isolating the originating source of the innovation itself.

Although this debate continues to remain unresolved, recent studies have focused on the underlying nature of both supply and demand in relation to innovation. Empirical research indicates that innovation occurs in a broader context than within the confines of industrial supply or user demand, but rather in a complex interrelated network of activities linking a wide range of stakeholders, including (but not limited to) users, developers, government and consultancies. Social networks such as Facebook8, LinkedIn9 and Twitter10 serve as examples of the interrelated nature of innovation, suggesting that effective innovation occurs for the most part at the boundaries of industry where technological developments are linked together with the needs of users through an original method, engaging and requiring the involvement of all parties.

The impact of innovation can be felt throughout societies on a variety of levels. From an individual corporate standpoint, an innovation is passed from the innovator to other individuals within a network. This process has a significant impact on the life cycle of innovations. The life cycle can be characterized by an S-shaped diffusion curve, commonly referred to as an ―s-curve.‖ The s-curve follows the growth of productivity against time and is derived from a portion of a traditional distribution curve.

The life cycle or product life of an innovation relates to the stages of development beginning with a start-up phase to a rapid increase in revenue and eventually resulting in a decline as new innovations displace the relevancy of the product. The life cycle of computer game consoles has been consistent over the past two decades as new products in this field emerge every four years. The market success of these innovations is somewhat predictable, but in reality, a large majority

of innovations never materialize into commercial products and are not represented on the curve. Innovations that are successfully introduced into the market begin with relatively slow growth. As the product develops an established foundation within the market, demand increases, driving a rapid increase in the product growth. Related incremental innovations including minor improvements drive product growth further. As the product matures, the growth rate declines and eventually begins to plateau. At this point, new innovations will typically replace the old technology, driving the now-outdated product into decline.

Many corporations develop innovation programs to take advantage of the product life-cycle curve. A key driver for these innovation programs in corporations is to achieve growth objectives. Davila et al. (2006) notes, ―Companies cannot grow through cost reduction and reengineering alone . . . Innovation is the key element in providing aggressive top-line growth, and for increasing bottom-line results‖ (p.6). As a product matures, these innovative companies will often develop products to replace them, introducing the new technology at successive intervals with the intent that the rapid growth phase of the more recent innovation will coincide with the peak of the aging product‘s s-curve. By timing intervals and accurately predicting a product life cycle, individual companies are able to maintain the highest consistent growth rate. These intervals vary greatly within markets and depend on many external and internal factors.

2.2 Innovation Indices

2.2.1 Requirements for Measurement Tools

Wise leadership is a critical aspect of effective governance. Plato expressed the importance of character-driven leadership in his writings on ―philosopher-kings‖ (Plato, 380 BC). Later writers including Aristotle expanded this concept by examining the designs of government from a legal and policy-driven standpoint. The progressive evolution of government systems have increasingly focused on policy as the

foundation for national leadership, and it is the lasting legacy of inspired policy that secures the success of nations throughout the difficult struggles experienced in each passing generation. The effective development of policy tools that target innovation require careful analysis of the innovation process from a national holistic perspective. This analysis requires methods of measurement to produce quantifiable data points on innovative progress.

Traditional measurement tools on the political level have focused on amount of national investment in R&D as a percentage of GNP. While a majority of national policy decisions concerning innovation continue to use this measurement, the

Innovation Imperative and to some degree the Oselo Manual address the need to expand global innovation measurement tools to support national policy decisions. In recent years, a number of national ranking systems have been developed that assess the level to which a nation has effectively implemented innovation measures. The Global Innovation Index and the International Innovation Index both examine national factors that impact innovation, including economic stability, banking methods,

national stimulation through policy and investment, infrastructure, technological development, institutional knowledge and capital wealth. These assessment tools are

shaping the parameters by which innovation is perceived, and forward-thinking countries will increasingly refer to these concepts in the development of future legislation and policy.

On the political level, policy results in regulations, legislation and codes of justice, national concepts that have been evolving for thousands of years. The earliest known written codes of government can be found in ancient Babylon where

excavations have unearthed a set of laws known as the Ur-Nammu of Ur, dating to 2050 BC. Many other examples exist of early government policy, including Lipit-Ishtar of Isin, the Hittite code, the Assyrian code, the code of Hammurabi of Babylonia and the Mosaic Law. Other early forms of government policy are also thought to exist in present-day Iraq where evidence of Sumerian policy possibly dates as far back as 2300 BC. Early policy concerns included citizen rights, humanitarian protections and tax relief efforts for the poor.

The significant cost of innovation underscores the importance of measuring tools to evaluate its impact. The organizational level and the political level represent the two areas of measurement in innovation. On the organizational level,

measurements relate to individuals, group-level assessments and private industry. Information is gathered through surveys, workshops and benchmarking. Lacking a true industry standard, the majority of corporate measurements evaluate a

combination of both qualitative and quantitative dimensions. Organizations often use internally-developed scorecards, ranking innovation process efficiency, business measures related to finance, employee performance and end user or customer benefit. Varying between industries, measured values may include research and development (R&D) costs, revenues from new products, revenues from older products,

time-to-market, and number of patents. On the political level, measurements relate to the global competitive advantage gained through innovation.

While both the organizational and political levels are interrelated in the way they are measured, the impact of innovation in a national context is measured primarily on the political level. The Frascati Manual was one of the first recognized measurement guidelines focused on innovation. Many nations have developed measurement tools based on these guidelines but to date, these measures have been largely insular, addressing policy concerns with respect to innovation from within the confines of national borders. For the most part, national governments develop

frameworks to evaluate organizational capabilities within their respective nations, resulting in a wide variety of evaluation methods that fail to account for international influences. With the increase in globalization, some governments are beginning to address these concerns from a more global perspective. European nations are addressing these global concerns through the European Foundation for Quality Management. Another organization that has begun to address innovation

measurements from an international perspective is the Organization for Economic Co-operation and Development (OECD). The OECD, an international organization of 30 countries originally created after WWII, is dedicated to the principles of democracy and free-market economy (OECD, 2009). In 1995, the OECD published the Oselo Manual, suggesting standard guidelines for evaluating technological product and process innovation. The current edition of the Oselo Manual (2005) considers a broader range of indicators including marketing and organizational innovation. These methods are largely focused on Europe and North America, but some suggest that globalization has drastically changed the dynamics of innovation requiring a truly global perspective of the policy impact on innovation, using measuring tools that have

yet to be developed. The Innovation Imperative (Marklund, Vonortas and Wessner, 2009) discusses the need for globalized measurement of innovation focusing on national innovation strategies in the global economy.

Policy as a national tool is particularly important in shaping the direction of a country. In general terms, policy is the course of action taken by a government with respect to a specific issue (Blakemore, 1998). The Australian Policy Handbook defines policy as a system of courses of action, regulatory measures, laws, and funding priorities concerning a given topic promulgated by a governmental entity or its representatives (Althaus et al. 2007). The concept of policy is in essence the

agreement to abide by a set of rules, a concept found throughout every society, but the manifestation of this concept in practice is different throughout the world. However, the application of this concept has taken many different forms, including communism, democracy, dictatorship, fascism, monarchy, and socialism, and many others. The differing political systems impact their citizens in a variety of ways and to varying degrees.

As a democratic nation, the United States espouses governance by the people. As a result, all citizens are potential stakeholders in the shaping of policy. The

concept of policy in the U.S. includes the study and the execution of political theories and practices. In application, policy refers to the political field of creating and

discussing legislative decisions. In one study, policy refers to the academic field represented in schools of public policy (Blakemore, 1998).

In modern government, national policies are often formed within the purview of a constitution. The Constitution of the United States encompasses the guiding principles by which the United States conducts its affairs. All policies are examined against the Constitution to ensure new regulations follow the accepted principles of

the nation. It is an accepted principle in the United States that the government is responsible for creating the conditions for its people to prosper. In order for a nation to uphold this responsibility effectively, however, a solid structure of governance must be in place. The social, economic and political variables in modern societies are increasingly great, and nations are in need of effective governance to achieve success in global competition. The foundations of the United States were shaped through the wisdom and insight of inspired policy shapers. The foresight of great men from centuries ago is still evident in the lasting relevance of their writings. As each generation passes, new struggles emerge, from civil rights to economic security and environmental protection. Each successive shift in societal evolution challenges the accepted principles of national governance, but it falls upon the nation‘s leaders to adapt to these changes by developing lasting policy directives to guide their nation through each difficult struggle.

A significant shift in political importance can be seen in the area of national competition on the international stage. Globalization has increased the competitive capabilities of all nations, particularly among developing powers. As a result, the international pressure to remain competitive has increased. This competition spans industrial development as well as technological progress. Boundaries to policy measures are always changing, and this change is accelerated through globalization, leading to increased challenges in addressing competition in the context of

international agreements. These growing challenges underscore the importance of establishing standardized comprehensive innovation measurement tools.

2.2.2 Methods of Measurement

From a policy perspective, the establishment of internationally standardized measurement tools for innovation is particularly difficult as national dynamics with regard to policy impact varies greatly from nation to nation. Political logics are, by definition, geographically constrained by national borders and bound by the

responsibility of establishing and protecting the conditions for wealth generation and security among its citizens. It is the national administrative borders that serve as the basis for policy power. Political geography has traditionally been confined to national borders due to the nature of sovereign governance. The nature of policy is symbiotic in relation to a nations population. The impact of a policy on a nation will vary from nation to nation as the makeup of populations vary between nations. As a result of this variance between nations, policies within a nation must be crafted to complement the populations they are designed for. As such, the measurements of innovation with respect to policy formation must accommodate these variances.

To truly understand the underlying rational in measurement structures with respect to policy formation, it is important to understand the dynamics of interaction of innovation within populations. A considerable body of literature on systems of innovation focuses on theoretical and empirical studies on the complexity and

institutionally-embedded processes of interaction and learning at the regional, sectoral and national level (Asheim and Gertler, 2005; Edquist, 1997, 2005; Loasby, 2001; Lundvall, 1992, 2005; Malerba, 2004; Nooteboom, 200). There is, however, a noticeable absence of comprehensive studies addressing the nature and types of strategic choices that public actors in systems of innovation are facing in the ever-changing social, economic and technological contexts (Lundvall and Borras, 1998; Borras, Chaminade and Edquist, 2009). The rationales for public intervention in

fostering innovation from the policy level have been predominantly abstract and theoretical, based on the properties of old knowledge and the nature of knowledge production systems, and not embedded in specific social, economic and institutional contexts (Metcalfe, 1995).

A foundation for the neoclassical approach to technology and innovation policy concerns the public rights to information, viewing knowledge as a public commodity that cannot be appropriated by the innovator due to its indivisibility and quasi-public good nature (Nelson, 1959). This approach to innovative development is considerably lacking in public incentives, and it fails to address the market drivers for innovative investment. This concern is addressed in the national contexts by means of patent generation, providing limited rights for knowledge appropriation by innovators as a financial incentive through private monetary returns on the innovators‘

investment. From another, broader point of view of government responsibility in innovation policy, national obligations relate more to the market conditions in general, providing the economic and political environment most conducive to private

investment in innovation. This approach encompasses the concerns regarding knowledge appropriation as well as market dynamics for competition with regard to technological freedoms in diverse options (Borras, Chaminade and Edquist, 2009). By creating Pareto-optimal market conditions, national governments are providing the environment most likely to achieve the greatest public economic returns from private investment in innovation.

This has long been the primary approach to policy generation. Globalization and increasing digital information dissemination, however, are creating a unique challenge for knowledge appropriation. The advancement of communication systems has facilitated the copy and transfer of proprietary information across the globe on a

tremendous scale. A familiar case involving peer-to-peer file transfer of national copyrighted material is exemplified in the A&M Records v. Napster2 legal dispute regarding music sharing. The shared country of origin for these two companies effectively enabled national policies to intervene to preserve the financial incentive for innovative development, but the cross-border, global nature of economic activity creates barriers of jurisdiction with regard to national policies. The international trends in innovative development indicate a dramatic increase in knowledge transfer across national borders. The increasingly borderless nature of knowledge –and particularly information– is impeding the ability of national jurisdictions to protect intellectual property rights, ultimately reducing the incentives for innovation investment. Knowledge appropriation is no longer defined in national contexts but rather in global contexts, where national policy solutions in the form of patent protection hold no authority. National governments have begun to address the global aspect of innovation incentives by signing international agreements such as the TRIPS3 (Trade-Related aspects of Intellectual Property Rights) agreement, and these initial steps towards developing effective policy in a globalized environment are a positive indication that national leaders are acknowledging the need for a better understanding of the policy dynamics of globalization. These first steps, however, are still in need of stronger legislative support, as enforcement and compliance with many of these agreements are proving to be challenging and geographically limited. The neoclassical assumptions of perfect competition with regard to innovation policies focus primarily on national solutions to problems. Traditional theoretical positions on when and how nations can effectively intervene must be revisited in the new global context.

The concerns brought about by globalization focus primarily on the nature of national borders. It is often argued that the importance of national borders is

decreasing as global economies are converging. This line of thinking, however, is flawed as it fails to consider the underlying logic of global economic development. Although globalization has considerably altered the structure of value systems,

business models and technological development, the importance of national borders is not decreasing but rather shifting away from corporate industry and towards national policy. Businesses are increasingly operating on an international level, spanning the national and political borders of multiple nations in the pursuit of capitalism. Business operations continue to expand past the jurisdictional limits of national borders,

spreading technology and acquired knowledge internationally. As such, national borders are no longer a limiting factor in operational activities for business and knowledge development. The importance of national borders, however, is increasingly focused on national policy.

National methods of government intervention through innovation policy extend further than theoretical concepts of knowledge appropriation, and active examples of national intervention should similarly be revisited in a global context. These policy instruments include a wide variety of approaches, exemplifying how current government actions impact innovative development within national boundaries. A prime example of active government intervention with regard to innovation is the public financing of research, allocating resources across various fields of study in support of research and development. The critical decisions in complex national economies center on determining which specific fields of study should receive public funding. These decisions attempt to weigh the potential returns in particular R&D fields from additional national resources by developing complex

stakeholder measurements, with the understanding that national investment should serve to foster innovative development in the economy in areas where private

investment is insufficient. A similar active governmental intervention method within the confines of national borders has traditionally been tax incentives for R&D expenditures. The complex variables involved in targeting specific government intervention are dramatically affected as globalization introduces additional

dimensions. With increasing globalization, the choices of public actors are strongly limited by processes they do not fully control (Archibugi and Iammarino 1999, p.326). The added complexities in these decisions stem from ambiguities regarding national benefactors in cross-national innovational investment. Industry is increasingly global, and national decisions regarding allocation of resources must now consider options of investing in foreign firms, with the intent of encouraging foreign firms to establish domestic operations within that nation.

The impact of globalization on the rationales for government intervention creates growing complexities in policy options for national leaders. Globalization is challenging the underlying assumptions of traditional approaches to innovation policy based on national conditions. The changing industry conditions at the global level are severely affected by operations in international markets with under-developed

institutional frameworks. This uncertainty in the changing landscape of the innovation process could possibly deter private investment in unproven innovative fields, and this volatile environment is leading to a significant rise in the need for innovation policy across the globe. Public action needs to focus on adaptability in the innovation process, exploring the means for generating national frameworks that are open to adaptability and creating national environments for firms to take advantage of the opportunities from globalization. The challenges for national policy vary greatly

throughout the world, and public action should focus on specific weaknesses to identify the aspects of various national structures that are deficient in addressing the capabilities of private industry to operate in a global environment.

The current shifts in the international environment are creating new struggles for policy shapers in adapting to a globalized world. The limited national scope of traditional policy tools is proving itself to be increasingly insufficient, and the

relevance of current national policies with regard to wealth creation is becoming more and more ineffective. In an increasingly borderless world where the exchange of knowledge and information is growing rapidly, traditional national investment

strategies in knowledge appropriation and innovation are resulting in the swift dilution of knowledge assets through globally-related processes. In a knowledge-based

economy, the gains of competitive advantage through national investment are decreasing as globalization progressively disseminates the new ideas of innovators, almost from the moment these ideas takes shape.

In a national context, the primary challenge for policy shapers is to increase the standards of living in a progressively competitive world. In nations where

economic development and structural adaptation are slow, economic competitiveness will gradually decline. For policy shapers to be effective, national structures must be flexible to accommodate the changing dynamics of international competition. A key aspect in adapting to this new environment is shaping national policy that attracts business innovation regardless of geographical boundaries. Competitive nations are recognizing the new dynamics of industry borders and crafting national policy that attracts both domestic and international business development. International

organizations like the European Union, OECD and the United Nations are placing a major focus on national policy formation with respect to improving innovation

competitiveness. This increased focus on policy competition among nations and regions has resulted in the development of a wide variety of political strategies for attracting innovation investments and innovation-based businesses. Yet, despite the recognized critical importance of innovation in wealth generation, most national governments do not consider ―innovation policy‖ as a unique and specific policy field. The focus placed on innovation in the policy field is primarily applied through various established fields, including defense and economic policy. Public policy is

predominantly embedded in economic and social activities, and the resulting incentive structures and opportunities for innovation developed through policy are often

conditioned by obsolete perceptions of national governance. Policies affecting innovation conditions and business competitiveness within national development are found throughout public policy and in all policy fields, without being explicitly addressed in overall policy development or relevant policy fields. This unfocused approach to innovation in policy, along with unstructured discussions on national competitiveness, results in an unguided and inefficient process within the policy arena. Consequently, challenges and opportunities related to innovation competitiveness, and the options and alternatives for policy development, are often ambiguous in most policy debates.

In recent decades, technology development, research and innovation activities have increasingly developed in a global context. The economic miracles produced by nations like Taiwan have prompted studies of these national development and

innovation examples (Lin, 2008). While new powers have emerged in global innovative competition, notably Asian countries, the underlying nature of

globalization is shifting away from international exploitation of nationally-produced goods to the global generation of innovation (Archibugi and Michie, 1995).

Ultimately, the geographical dynamics of innovation activity are distorting the boundaries between local, national and global innovation systems. The new global environment is introducing distinctive complexities in the national realms of policy development. When and how to intervene from a national context in the system of global innovation is becoming increasingly important, presenting the need for a comprehensive understanding of rationales for public intervention through policy (Borras, Chaminade and Edquist, 2009). This global imperative for innovation presents an absolute obligation for the national policy shapers across the globe to develop their understanding of the complex and changing variables related to innovation policy. As global environments and systems of government grow and evolve, so too must leaders grow, adapting to changes to remain effective in their public service.

The strategic choices for national policy shapers must examine specific areas of policy reform within their respective nations. Policy researchers need to examine the allocation of R&D resources, policies on intellectual property rights relating to the balance of individual and social returns, regional development policies relating to institutional frameworks for facilitating local interactions, and policies focused on transforming low-technology industries into higher added-value sectors of the economy. The revelations obtained by examining these rationales for innovation policy will begin to address weak areas in traditional theoretical policy guidelines, providing a clear direction for policy makers to identify specific policy solutions with far-reaching oversight of the causal mechanisms of industry failures, possible

responses to them and the ultimate innovative output. These clear guidelines will enable policy shapers to determine when, why and how governments should intervene in innovative development. These rationales need to be embedded in specific social,

economic and institutional contexts for each country, bridging the gap between political practice and theoretical discussions of governmental intervention in the innovative system. To achieve this detailed country-specific analysis for policy guidelines, further empirical research is needed to develop national directives for policy shapers, identifying clear, country-specific objectives and tools for strategic decisions in innovation policy.

The opportunities in policy development brought about by globalization are great as well. The prospects of wealth generation through globalization are steadily increasing. As global competition increases, the need for continuous business renewal similarly accelerates. Innovation serves as the main determinant in economic

productivity, business renewal and wealth creation, and for this reason it is becoming an increasingly critical aspect of national public policy.

New policy statutes require a new understanding of the international dynamics between legislation and innovation. Innovation continues to be the driving force in wealth creation. In the United States, innovative efforts by once-small companies have contributed greatly to the economic success of the nation. Microsoft, a once-small company begun by Bill Gates and Paul Allen, now has an annual revenue of over $60 billion US, and provides jobs to almost 90 thousand people (MSFT, 2009). Innovative developments such as the mobile phone, invented by Martin Cooper at Bell Labs, have created new markets that once never existed. There are now over four million mobile phone subscriptions in the world (ITU, 2009). Despite great historical success in the field of science and technology, growing international competition will require that national investment in innovation must adapt to changing trends in order to remain effective. As a nation, the need to influence innovation as a wealth-building process remains constant. The objectives of innovation-related policy are politically

determined and can be economic, military, environmental or social in nature (Borras, Chaminade and Edquist, 2009). In practice, innovation policy initiatives are attempts to solve or mitigate ―problems‖ in the innovation system. Such problems exist when actions of private industry do not automatically lead to the fulfillment of their objectives. This implies that public action should not replace or duplicate private action, but should supplement it and address specific problems associated with the incentives for innovation. But to design effective innovation policy initiatives, the policy shaper must first understand the source behind the problems affecting economic growth and the innovation process.

The challenges and opportunities presented in developing effective innovation policy for the future require extensive analysis to develop a clear understanding of the options and implications for government action. Most economic research on

innovation policy rationale focuses on two distinct deductive approaches to the methods and manners for government action regarding when and how to intervene in innovative development. Based on traditional economic posturing, influential works by economists such as Arrow (1962), Nelson (1959) and Machlup (1980) address the economic virtues of achieving optimal Pareto equilibrium with respect to the

allocation of resources to innovation (Metcalfe, 1995). This philosophy considers the level at which a change in resource allocation can improve one individual without harming other individuals. This rationale considers the primary objective of public intervention to be the national recognition of market failures which prevent Pareto optimality.

Economists are currently developing tools to harness the opportunities these changes have brought about, and while revolutionary solutions have been

theory. This global change in the technological environment for innovation is not the result of economic growth but rather an integral component in the process. For nations to progress, technological change is inevitable (Nelson and Winter, 1982; Dosi and Orsenigo, 1988). But although this global dynamic is understandable in economic theory, the developing solutions differ dramatically. Increasingly, economic theory regarding innovation policy is diverging into two schools of thought. Equilibrium economists focus on Pareto optimization, considering the role of policy in limited contexts, with the primary responsibility of addressing market failure by securing sufficient investment for technology investment in private industry. For evolutionary economists, technological development and the innovative process is a natural result of a progressive societal structure as a whole. The innovative process is the fruit of corporate behavior in an ever-changing context characterized by a high level of complexity and institutionally-embedded processes of interaction and learning (Metcalfe, 1995). The evolutionary policy-maker is not concerned with achieving Pareto-equilibria of societal investment in technology, but rather with the innovation system‘s ability to adapt to changing conditions in order to maintain and enhance the knowledge and technological capabilities accumulated by firms and industries through time (Borras, Chaminade and Edquist, 2009). Therefore, rather than focusing on market failure, the evolutionary policy-maker focuses on a series of systemic failures or problems such as infrastructure provision, technological lock-ins, network

problems and transformational problems (Smith, 200; Woolthius and Lankhuizen, 2005). This all-encompassing theory addresses all aspects of national development focusing on the adaptability of the actual innovation system. Realizing the

opportunities from globalization will require a comprehensive analysis of national systems, developing new resources for private industry where competitive advantages

are being redefined. Realizing these opportunities depends on industry‘s ability to adapt to changing circumstances, and innovation policy must address the institutional roadblocks that restrain adaptability. Unfortunately, the gap between economic theory and policy action is great. Setting priorities, designing instruments, developing new institutional arrangements, and monitoring and evaluating current policies are

connected only in a general way to the literature on policy rationales (Metcalfe, 1995, p. 410). Current policy makers are grappling with the challenges presented in adapting to new economic and political environments.

The tools policy makers are using rely greatly on developing measurement tools that are currently being formulated. In recent years, a number of indices have emerged that are geared towards measuring national innovation levels. The Global Innovation Index and the International Innovation Index are two primary indices that measure national innovation levels. While both rankings differ, the measurement variables are similar, addressing issues from infrastructure, banking stability, financial commitment to R&D, education and innovative developments and outputs.

The International Innovation Index, produced jointly by The Boston

Consulting Group and the National Association of Manufacturers, pertains to be the largest and most comprehensive global index of its kind. The variables that the International Innovation Index considers focus primarily on the business outcomes of innovation as well as a government‘s ability to encourage and support innovation through public policy. The index also includes new policy indicators for innovation, including tax incentives and policies for immigration, education and intellectual property. To rank nations, the index measures both inputs and outputs. Inputs include: government and fiscal policy, education policy and the general innovation

results including business performance, labor productivity, total shareholder returns as well as the impact of innovation on business migration and economic growth. These variables can be broken down into four primary categories including: the economy, technology, education, government tax & finance. These four categories are also prominent in the Global Innovation Index.

The Global Innovation Index is produced by the University INSEAD, as a means for identifying the degree to which nations are responding to the challenge of innovation. Similar to the International Innovation Index, the Global Innovation Index examines a nations capacity to benefit from leading technologies, increased human capacities, organizational and operational developments, and enhanced institutional performance. The index compiles a number of related measurements and concepts in a holistic comparison of indicators, highlighting a nations strengths and weaknesses with respect to innovation related policies and practices. The index uses a method of five inputs and three outputs that relate directly to a nations innovative capacity. Sources for this data include the World Bank, International Telecommunications Union and other similar institutions. The variables include information such as university enrollment rates, GDP growth rates and penetration levels for new

technologies. Other more subjective data is drawn from the World Economic Forum‘s annual Executive Opinion Survey and helps capture concepts which are unavailable in hard data. These essential concepts include perceptions on the quality of corporate governance, the quality of scientific institutions, and the quality of intellectual property rights protections.

The five input variables include: Institutions and Policies, Human Capacity, Infrastructure, Technological Sophistication and Business Markets & Capital. These variables are critical aspects that strengthen the ability for a nation to develop

knowledge and ideas as well as leverage them for innovative products and services. The three output variables include: Knowledge, Competitiveness and Wealth. These are ultimately the tangible benefits to a nation from innovation. The eight variables measured in this index are comprised of quantitative and qualitative indicators. These variable indicators are as follows:

INPUTS

INSTITUTIONS AND POLICIES Independence of judiciary

Demanding regulatory standards Prevalence of laws relating to ICT Quality of IPR

Soundness of banks

Quality of scientific research institutions Quality of management/business schools Legal obstacles to foreign labor

Time required to start a business Time required to obtain licenses Rigidity of employment index Investor protection index ICT priority for government HUMAN CAPACITY Brain drain

Quality of human resource approach Quality of math and science education Graduates in engineering

Graduates in science Population 15-64 Urban population

Schools connected to the internet INFRASTRUCTURE

Quality of general infrastructure

Quality of national transport network Quality of air transport

Fixed line penetration Mobile penetration Internet penetration International bandwidth ICT expenditure

Personal computer penetration Mobile price basket

Access to loans

Sophistication of financial markets Issuing shares in local share market Corporate governance

Buyer sophistication

Customer orientation of firms Domestic credit to private sector FDI net inflows

Gross private capital flows Gross capital formation Extent of clusters

Commercial services imports Manufactured Imports Private investment in ICT Informal economy estimate

TECHNOLOGY AND PROCESS SOPHISTICATION Country's level of technology

E-Participation index E-Government index

Government procurement of advanced technology Internet use by businesses

Competition among ISP providers Company technology absorption Telecom revenue

Secure internet servers per 1,000 people Spending on R&D

Royalty and license fee payments Business/university R&D collaboration

OUTPUTS

KNOWLEDGE

Local specialized research and training Nature of competitive advantage

Quality of production process technology High-tech exports

Manufactured exports ICT exports

Insurance and financial services

Patents registered (domestic and non-domestic) Royalty and license fee receipts

COMPETITIVENESS

Growth of exports to neighboring countries Intensity of local competition

Reach of exporting in international markets Commercial services export

Merchandise exports Goods exported

Service exports

Listed domestic companies WEALTH

Final consumption expenditure GDP per capita, PPP

GDP growth rate Industry, value added Manufacturer, value added Services, value added

International migration stock Value of stocks traded FDI net outflows

Other index measures such as that of the Human Development Index, measures variables including: Life Expectancy At Birth, Adult Literacy Rate, Combined Gross Enrollment ratio for Primary, Secondary and Tertiary, GDP per capita, Life expectancy index, Education index and GDP index.

The variables measured in these indices, all relate to the general health of a nation. Questions regarding the individual capacity of populations across different nations aside, the general health of a nation ultimately has a substantial impact on the capacity of a nation to innovate. The methods of measurement for this capacity in the various indices differ as the weight attributed to different variables differ between the indices. However, the underlying measurements all revert to basic concepts from the economy, technology, education and policy, particularly relating to tax and finance. It is incumbent upon American policy leaders to sufficiently understand the variables of measurement in these particular fields of economy, technology, education, tax & finance, to adequately shape future policies that address the rising competition from other nations, exemplified in the Global Innovation and International Innovation indices.

Charts

Rank Country Rate 1 United States 5.74 2 Switzerland 5.61 3 Denmark 5.58 4 Sweden 5.53 5 Singapore 5.53 6 Finland 5.50 7 Germany 5.46 8 Netherlands 5.41 9 Japan 5.38 10 Canada 5.37

Chart 1 08-09 Global Competativeness Index

Country Rate 1 United States 5.80 2 Germany 4.89 3 United Kingdom 4.81 4 Japan 4.48 5 France 4.32 6 Switzerland 4.10 7 Singapore 4.10 8 Canada 4.06 9 Netherlands 3.99 10 Kong Kong 3.97 11 Denmark 3.95 12 Sweden 3.90 13 Finland 3.85

14 United Arab Emerates 3.81

15 Belgium 3.77 16 Luxembourg 3.72 17 Australia 3.71 18 Israel 3.68 19 South Korea 3.67 20 Iceland 3.66 21 Ireland 3.66 22 Austria 3.64 23 India 3.57 24 Italy 3.48 25 Norway 3.48 26 Malaysia 3.47 27 Spain 3.38 28 New Zealand 3.35 29 China 3.21 30 Kuwait 3.14

3

Innovation measurements in the US

In order to develop clear national guidelines for American innovation policy, a thorough understanding of fundamental American social, economic and political structures must be established, to effectively develop compatible policies that target the key variables outlined throughout innovation indices. Measurement tools from a policy standpoint must work in conjunction with the unique dynamics of American society. From a social perspective, Americans are particularly innovative by nature, and American innovation has exemplified the entrepreneurial spirit of Americans. This spirit is also embodied in the notion of the ―American Dream,‖ an idea

describing the opportunity for personal, social and economic advancement offered in the nation. This opportunity is, to a great extent, presented through the freedoms afforded to American citizens. Innovation, in essence, is the freedom to think new ideas. For over two hundred years, America has developed through the efforts of immigrants seeking freedom and the American Dream, who have traveled from across the world to the shores of the United States with the hope of creating a better life for themselves. This adventurous spirit has consolidated independent thinkers from every nation, creating in the United States a population of innovative explorers.

The diverse strengths of the many American people groups have produced many of the world‘s most revolutionary ideas and discoveries, pushing the United States to the forefront of world innovation. The personal freedoms and opportunities offered through the American political system continue to attract brilliant minds from across the world, with the result that many American innovations are created by individuals who were not born in the United States. Currently, foreign-born

Americans account for ten percent of the national working population, and yet, they represent twenty-five percent of the U.S. science and engineering workforce.