Why Renewing American Innovation? The “Endless Frontier Act” and Biden’s Bid for Maintaining U.S. Global Competitiveness
After giving the pandemic-ravaged U.S. economy a much-needed boost and now introducing an ambitious $2 trillion infrastructure and jobs package, President Joseph Biden will reportedly move to aggressively counter China’s global economic and technological aspirations by supporting vital U.S. industries. This effort will likely focus on increasing production of semiconductors and launching a nationwide 5G network, among other key areas. Tapping into unusually wide bipartisan support for this “Endless Frontier Act,” Senator Charles Schumer (D-NY), together with Senator Todd Young (R-IN)—who in 2020 introduced the original Endless Frontier Act with Senator Schumer—will provide the main outline for the measure. If passed, this legislative package would help U.S. firms retain and renew their innovation edge, global competitiveness, and leadership against Chinese ambitions in science and technology. Though not wrong to fear China’s rise and seek to counter it, the Donald Trump administration and its trade war against China was akin to tripping the opponent during a marathon. If the opponent is truly the more skilled runner, they can weather the setback and still win the day. The United States needs a strategy for winning the marathon itself.
The China Challenge
China today poses both a technological and security threat to the United States that no country has in modern history. U.S. companies operating under free market rules struggle to compete against state-backed Chinese firms that can ignore a poor quarter while enjoying one of the largest, most-protected markets in the world. With the support of the central government, key Chinese firms are free to innovate and compete in the global market without financial worries while Chinese scientists can focus on research and development instead of seeking grants for their university or research institution. According to Tulane University professor and former Aspen Institute CEO Walter Isaacson in 2019, China has modeled its approach along the lines of U.S. scientist Vannevar Bush’s 1945 report Science: The Endless Frontier, which, besides being the inspiration behind the name of the proposed legislative package, promoted government funding of basic research together with universities and industry—a priority of the Franklin D. Roosevelt administration. As the Chinese government sets long-term strategic goals like Made in China 2025, which was part of China’s 13th Five-Year Plan of 2016-2020, the United States needs to return to its post-World War II values of equating leadership in science and technology with national security and prosperity.
Today, U.S. companies locked in close competition lack the incentives to maintain in-house capabilities for innovation, like they did in the mid-century era of AT&T’s Bell Labs, DuPont’s central R&D unit, Xerox PARC, and others. Heightened competition, shareholder pressures, and new incentives pushed firms to cut these in-house research units back in the 1980s. Since then, the share of applied research in total corporate R&D expenditures fell from 30 percent in 1985 to below 20 percent in 2015—all well below the peak of almost 40 percent in the 1950s. Of course, the Harvard Business Review in 2014 famously suggested that, despite being the source of great inventions throughout history, China today is a “land of rule-bound rote learners” where breakthroughs are rare. Because of this, some argue the Chinese are not great innovators and China’s state-backed system could itself breed complacency and come back to bite it in the near future. However, even by then, experts warn, the United States will have missed the train on many important technologies and will be struggling to catch up.
Despite Silicon Valley and the millennial generation’s supposed penchant for innovative disruption, U.S. total factor productivity has been slowing since the 1970s. Productivity today is the lowest in more than a century. Innovation, historically a clear driver of U.S. productivity, means the creation of ideas and inventions that are translated into practical value and improve the quality of people’s lives directly or via their ability to grow the economy. Whether measured in terms of triadic patents (patents filed in the United States, Europe, and Japan), most available measures of productivity, or even startup company creation, the United States’ trademark innovative spirit has been gradually dampening for decades. And if not for China’s meteoric rise this century, the United States might still be sleepwalking—optimistically but without a serious plan—instead of waking up to the need for a coherent national strategy.
U.S. Complacency, and How We Got There
Noted George Mason University economist Tyler Cowen and other experts have recognized a growing “complacency” in American life as the indicator of a societal shift from the United States’ early dynamism. From the turn of the twentieth century until roughly the moon landing of 1969, the breakneck pace of groundbreaking technologies that directly affected the quality of life and the structure of U.S. society was simply astounding. Yet, since the first moon landing in 1969, only the internet and its application to more and more parts of our lives can claim to have made any meaningful impact—meaning that physically the world of 1969 is much more like that of 2021 than 1969 was of the early twentieth century. This, of course, is not meant to discredit the great advances in medicine and human genomics made in the last few decades, for example, but to show how the rate of society-changing innovations has not maintained the pace that existed from the mid-nineteenth century until roughly 1969.
In the developed world, this slowdown has unfortunately contributed to wage stagnation, the shrinking of the middle class, and greater political polarization domestically. Coinciding with the waning days of the Soviet Union’s power in the 1980s, the U.S. innovation decline was masked at home. Further, the Soviets of that period no longer posed a technological threat to the United States. Japan on the other hand, posed a great technological threat in the 1980s but was and is a staunch U.S. ally, and not a security threat. Unchallenged abroad and riding the dual-edged optimism of the internet boom of the 1990s and the victory over communism, the United States missed the ways in which it was giving up the advantages that made it such a powerhouse in the mid-twentieth century.
Industry experts have also suggested that the United States put its position up for grabs when it began to outsource important production—which President Biden alluded to during the signing of a February 2021 executive order aimed at reducing supply chain bottlenecks. Starting in the 1970s and 1980s, the United States began to outsource production of semiconductors and displays mostly to Taiwan and South Korea, which today account for almost half of all semiconductor manufacturing capacity in the world. Further, adding in mainland China and Japan shows that a whopping three-quarters of all semiconductor manufacturing capacity comes from East Asia—a sharp departure from 1990, when the United States still provided about 50 percent of all global manufacturing capacity. Removing itself from the production process means the United States misses out on important chances for innovating as well as for developing a strong high-tech manufacturing workforce.
The Internet and the Fourth Industrial Revolution
Today, the greatest innovations of the past 50 years have all derived from the internet, the computer, and how these have been used to simplify lives and give more and more people access to the unprecedented treasure trove of the internet. Yet, only 47 percent of U.S. high schools offer at least one computer science course as of 2020, and U.S. teenagers trail behind those in other Organization for Economic Cooperation and Development countries, China, and Taiwan in math and science, as measured by Programme for International Student Assessment (PISA) scores. Initiatives like serial inventor Dean Kamen’s FIRST and tech entrepreneur Hadi Partovi’s Code.org have sought to change this, highlighting the proliferation of nongovernmental efforts to place the United States back on track by imbuing the leaders of tomorrow with the skills we need today. While the United States currently outpaces Japan and is keeping stride with Russia in terms of percentage of university graduates pursuing a STEM degree every year, it is now behind India, and even further behind China in terms of percentage of STEM graduates among degrees awarded. Yet, the world’s top universities are still overwhelmingly in the United States even if some Chinese institutions have been slowly climbing into the top 50.
While the internet’s growing prevalence in our lives over the past few decades has been less dramatic than the life-changing inventions of the first half of the twentieth century, technologists, and most notably World Economic Forum executive chairman Klaus Schwab, say that we are now on the cusp of the “fourth industrial revolution,” following a tradition of progress started in the nineteenth century with mechanization and steam power, then with mass production and electricity in the early twentieth century, and most recently the introduction and growth of information technology and automation that have come to define our lives for the past few decades. This fourth phase will see the growth of the internet of things (IoT) and systems that will connect us all further, offering an almost irresistible power to authoritarian models like China’s. Failure of the United States to maintain its dominance in setting global technology standards and digital infrastructure effectively opens the door to others who would use this space for a closed, authoritarian internet at odds with the open, free-exchange model originally intended for digital networks.
A Promising Shift for U.S. Global Competitiveness
In a promising move that aligns with the Biden administration’s stated priorities, in March 2021 new Intel CEO Patrick Gelsinger announced that Intel would move to relieve the semiconductor shortage in the United States by investing $20 billion in two new chip manufacturing plants in Arizona and offering foundry services for manufacturing and testing products. Given how prohibitively expensive these plants are, there are only a few companies globally willing to invest in this type of manufacturing, which makes Intel’s decision even more important for U.S. competitiveness. Lessening U.S. reliance on foreign firms like South Korea’s Samsung and Taiwan Semiconductor Manufacturing and helping bring advanced technical manufacturing back to U.S. soil is a key factor, especially since China has the advantage of now having been the world’s workshop for decades. Given the right incentives, these foreign semiconductor firms have also stated their interest in setting up facilities in the United States. And of course, the industry’s assured global competitiveness should be further ensured by increased and properly allocating U.S. federal funding for the research aspect of R&D.
The proposed Endless Frontier Act could be a key step in the right direction for revitalizing the United States’ hallmark innovating ethos in the face of a powerful state capitalist system. While we do not know what exactly to expect from this coming legislation, we do know that putting U.S. innovation, and therefore its global competitiveness, back on track is key to the success in the face of an emboldened, authoritarian China.
Returning semiconductor manufacturing to the United States and giving firms the right incentives to innovate should be the most immediate goals, but making this century the American century will require many more pieces. Reforming its outdated patent laws, more aggressively pursuing Chinese theft of U.S. intellectual property via the World Trade Organization or by other means, playing a larger role in international standards-setting bodies, reforming the immigration system to make it easier to retain skilled foreigners and allow them to contribute meaningfully to the U.S. society, and certainly revamping the national public school curricula is not even an exhaustive list of what the United States can do to win this technological struggle and to continue to lead the world in the twenty-first century. The success of the Endless Frontier Act and the support it generates from the private sector will be a crucial bellwether for gauging the true national appetite for setting aside political differences for a goal that will set the course for the next century.
Alexander Kersten is director of the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS) 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).
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