What Does “Out-Innovate the World” Mean Today?

2/15/11

Today, much manufacturing has gone to China, many services are going to India, and agriculture is threatening to go to South America. What will the U.S. excel in? Innovation is the frequent response. Indeed, President Obama has issued a clarion call to the nation: “We need to out-innovate, out-educate, and out-build the rest of the world.” But what does “out-innovate” the rest of the world really mean today?

Our recent research suggests that China and India have grown to lead all countries in privately funded new R&D investments, jobs created, and new projects. Moreover, both nations are steadily moving from imitator nations to those with radical innovations of their own. Indian firms have brought out some amazing innovations in the small car, mobile phone service, cataract surgery, and prosthetics areas, to name a few. China has impressed the world with advances in electric car batteries, low cost solar energy panels, bullet trains, stealth aircraft, and space technology, as examples. The decade and century ahead will see even greater innovations from these and other emerging economies. These markets are blessed with huge, growing, restless, and increasingly wealthy populations. Such populations create demand, nurture their own innovators, and stimulate local innovations. Indeed these economies have millions of entrepreneurs. Innovation is no longer the prerogative of developed economies.

In this context, to “out-innovate” the world is urgent but complex. The flight of R&D to emerging markets is driven by low costs, abundant talent, and growing markets. Failure to locate R&D in emerging markets risks the loss of an innovative edge to competitors. On the other hand, location in foreign countries risks leakage of talent, implicit knowledge, and explicit know-how to foreign entrepreneurs. Some countries, such as China, make transfer of know-how a pre-condition for trade and manufacturing.

What can U.S. firms do to best innovate in this changing environment? First, firms should abandon the mantra to locate R&D close to headquarters. Instead, they should locate their R&D in research clusters the world over, where talent and demand are abundant and the environment is conducive. Second, firms should exploit the innovative potential of entrepreneurs in home and foreign nations. Third, firms should build a culture of relentless innovation. Our research indicates that key traits that firms should try to inculcate in their organizations are encouraging innovations to cannibalize current products, embracing risk, and focusing on the future. These traits in turn can be institutionalized by empowering innovators, fostering internal competition, and providing incentives for enterprise not seniority. Unions can partner with management in abandoning the security of relying on seniority-based incentives for the productivity of enterprise-based incentives.

What can the U.S. government do to win the race to innovation? U.S. universities currently attract top talent from around the world and train and incentivize them to be innovators. While these graduates would love to stay on and work in the U.S., tight immigration quotas make this tough. The government needs to immediately increase the retention of this wealth creating talent.

For example, Silicon Valley is the envy of the world in being a highly innovative cluster that has created enormous wealth in the last 40 years. Yet, reportedly half of all startup founders today in Silicon Valley are of foreign birth. In the same time period, Israel has become a highly innovative country on several metrics. An important driver of this innovativeness was the immigration of trained scientists and mathematicians from Eastern Europe and Russia. Thus, the U.S. should make a concerted effort to ensure that talent comes to the U.S. to create innovations here rather than abroad where they compete with U.S. products.

Governments must also realize that jobs do not guarantee innovations, but innovations create jobs. For example, Intel, Google, and Facebook grew and are growing to be major employers on the basis of radical innovations. Thus, tax incentives for research and development and the commercialization of innovations are likely to yield higher returns in terms of innovation, wealth creation, and global competitiveness than job programs designed to immediately employ people.

U.S. schools lag their counterparts in developed countries in terms of science and math scores. However, U.S. schools foster more questioning, independence, and initiative in students than schools in other parts of the world. Indeed, this attitude may be one of the principal drivers of innovation in the U.S. Governments need to realize the huge role such traits play in developing innovations and foster them. For this purpose, inter-school innovation fairs and competitions would probably do more than training for rote test taking in math and science.

Today innovation is an imperative, not an option. It improves the standard of living, rewards individuals handsomely, and creates national wealth. Millions the world over are hungry to create the next big innovation. The U.S. must attract and develop and retain within the country this global talent in order to stay at the frontier of innovation. Firms for their part need to consider the global marketplace as the grounds for their innovation and develop a culture of relentless innovation to win this race.

Gerard Tellis is the Jerry and Nancy Neely Chair in American Enterprise and Professor of Marketing at the USC Marshall School of Business. Follow @

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