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How The Government is Killing Innovation

TL;DR: Federally funded R&D is declining, resulting in stagnant productivity growth, lagging competitiveness and reduced innovation. Now is the time to fix it. This is the first of three posts in a series focusing on this issue and how to address it.

Innovation is directly linked to economic growth and development.

Not only is it key to being competitive in a globalized economy, it’s critical for us to survive and thrive as a species. Innovation drives increased wages, improves life expectancy, raises the standard of living, increases social stability, and makes technology more affordable. While the average citizen may think of innovation as a corporate buzzword, you know that it simply means human progress.

Everything from food production to transportation is being disrupted in response to the pressures of an increasingly crowded world. In the wake of this disruption, governments, communities, companies, NGOs, and individuals are scrambling for solutions — not just to the disruption itself, but it’s unexpected secondary and tertiary impacts.

We also face unprecedented challenges including pandemics, climate change, food shortages, conflict, cyberattacks, and loss of biodiversity. Over the coming decades, we will come face-to-face with these more frequently. This doesn’t have to be a depressing statement, as long as we proactively and intelligently use innovation to address these challenges.

Because of competitive pressures in modern markets, the world is experiencing an underinvestment in research by private sources, and what is funded tends to focus on short-term, low-risk development. Nearly 80% of every private dollar spent is targeted to developing immediately profitable products or services.

Economic theory defines the broader need for public investment.

When innovation is created with public money, then refined and taken to market by private corporations, the value of the innovation is more fully realized by society.

A prime example of this is the fact that two-thirds of the most momentous and far-reaching technologies of the last 50 years were funded “by federal R&D at national laboratories and universities.” Personalized medicine, smartphones, autonomous vehicles, and other transformational innovations grew from critical technical components to public R&D.

A 2014 National Academies panel on the American research enterprise explained that “Increasingly, the government is called upon to fund high-risk, long-term research and some types of applied research, particularly proof-of-concept research, at least to the point where the risks of an investment are reduced to attract private-sector funding.” In other words, the government funds research that is too risky for venture capitalists and other private sources.

Indeed, venture capital and public innovation funding are tightly linked. The creation of Silicon Valley itself was catalyzed by public funding. In a an article titled, The Government Once Built Silicon Valley, investor, entrepreneur, and thought leader Vitaly Golomb succinctly outlined the events:

“It all got started when Fredrick Terman returned to Stanford with 11 top researchers from the Harvard Radio Research Lab. He landed the first government contract in 1946. By the start of the Korean War in 1950, Stanford was the single best prepared institution to help NSA, CIA, and various military branches on classified Cold War technology research.

The U.S. government soon became Stanford research’s biggest customer. Thus, the Bay Area quickly moved from apple orchards to becoming Microwave Alley and spawning companies like Varian.

By the mid-50s, the first Silicon Valley IPOs began attracting the attention of east coast ‘risk capital’ investors and the first Bay Area angel investors. In 1958, the Small Business Administration (SBA) created a 2:1 fund-matching program to encourage venture capital investment. In 1978, the government slashed capital gains taxes and allowed pension funds to invest in venture funds. This created an inflection point for the venture capital industry and grew it 10-fold overnight.”

Today, despite an increasingly robust funding ecosystem, we are not seeing the same returns on public investment.

The economic impact of federally funded R&D is declining, which is resulting in “stagnant productivity growth, lagging competitiveness and reduced innovation.”

This is the first of a 3-part series from Subscribe to learn how this happened, and what we can do about it.