Forget Industrial Policy. It’s Now Innovation Policy

Proving once again that what goes around comes around, industrial policy is back, although this time we’re calling it innovation policy. The new name is both a better description of what is being considered and a way to avoid the pejorative “picking winners and losers” label affixed to the old name. Despite the new name, however, it is an old policy, and it has worked well for the United States. Going as far back as the Lincoln administration, the U.S. government has frequently devoted government resources and attention to the pursuit of economic policy goals in the name of helping—for instance—farmers, manufacturers, inventors, the military, international competitiveness, and national security.

Government actions in the second half of the nineteenth century such as the Homestead Act and the promotion of land-grant colleges undertaking agricultural research were designed to help farmers—a more significant population then than now. In the process the United States created what became probably the most efficient and productive agriculture sector on the planet. Later, at the behest of the U.S. Navy, we spent millions developing wireless communication followed by support for the aerospace industry. More recently, consumers all over the world have benefitted enormously from government support for what were initially innovations for the military—GPS and the internet.

The latter two examples are instructive for two reasons. First, they were started with U.S. national security in mind. Second, they led to civilian spinoffs that have had a much bigger impact on the economy and society than anyone had conceived at the start. (There are smaller examples of the same thing; for example, night vision equipment, which originally was designed to give the U.S. Army a combat advantage but over time has also developed into a commercial industry for miners, firefighters, and hunters and fishermen.)

These examples also provide valuable lessons. First, people across the political spectrum will support government intervention if it is done in the name of national security. Second, when you mess with the market, there are always unintended consequences. Sometimes they’re good, as in the case of the GPS and internet, but sometimes they’re bad. Government generally does not do a good job of anticipating long-term effects of innovation it has sponsored.

Currently, politicians from the president on down are seized with the need to up our game to better compete with China, and the pandemic has exposed supply chain vulnerabilities that have lent urgency to the situation. The president has issued an executive order requiring studies of a number of critical sectors, as I discussed last week. The one drawing the most immediate attention is the semiconductor industry, which faced a similar crisis in the late 1980s and early 1990s and survived thanks in part to a well-conceived and well-executed government strategy, documented by Tom Howell in his book, Creating Advantage: Semiconductors and Government Policies in the 1990s Semiconductor Industry Association.

It appears we have learned from that episode, as a recent event at the Wilson Center demonstrated. Several participants made the point that successful, government-led innovation involves more than throwing money at a problem, although that is also necessary. In the words of Victoria Coleman, a former director of the Defense Advanced Research Projects Agency (DARPA), the agency responsible for many of our most interesting innovations, “What really matters is we need a national semiconductor strategy that has quantifiable objectives.”

Currently, there are numerous bills, including the CHIPS Act already in law, which provide for the development of such a strategy and authorize funds to implement it. As Congress and the administration sort through the alternatives, they should keep several things in mind.

First, a strategy should focus on both strengths and weaknesses. In the semiconductor case, our strength is the front end—invention and design—and our weakness is the back end of fabrication, assembly, and packaging. As the latter has moved overseas, largely for cost reasons, we are now seeing supply chain vulnerabilities that will affect our security. Also, as R&D continues to move to overseas labs operated by U.S. companies, we are being reminded of an old cliché: if you don’t make anything, eventually you won’t invent anything. But the converse is also true: if you don’t invent anything, you won’t have anything to manufacture. A good government strategy will support both ends of the spectrum.

Second, any strategy must be implemented cooperatively with industry and research institutions like universities. The U.S. model has never been the top-down, state-directed approach of China that funnels money to state-owned enterprises and hopes for the best. That approach has had some successes, but it has also wasted billions of dollars and created excess capacity, whose production is then dumped on the rest of the world, forcing companies in market economies out of business. Instead, we should remember what has worked for us before—support for fundamental research and targeted support for further development in selected sectors. The government should not be picking winners, but if it sees one, it should be smart enough to back it.

The reality is that the United States is good at this. We have had more than 150 years of practice, and that has helped make us the world’s leading economy. We should not fail to meet these new challenges, just as we met the past ones.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2021 by the Center for Strategic and International Studies. All rights reserved.