The Future of Innovation: Can America Keep Pace?

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Horacio Salinas for TIME

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But while novel business ideas are crucial to innovation, so too is new technology. Eric Schmidt, the executive chairman of Google, argues that "you need both." In Google's case, he explains that the technological breakthrough of a new and better search program came first; only later were ideas about how to make money out of it developed by building a new model for advertising sales.

The ecosystem that encourages technological breakthroughs and their application does not develop in a vacuum. It requires great universities, vibrant companies that devote time and energy to research and — yes — large amounts of government funding. The latter may be a controversial topic in theory, but in practice, the rise of technology was clearly fueled by government. A multitude of technological innovations have been associated with the government, often with the military. Forget the steam engine (developed using cannon designs and technology) and take something as modern as the microchip. After it was invented in 1958 by Texas Instruments, the federal government bought virtually every microchip that firms could produce. The Breakthrough Institute reports in a paper that "NASA bought so many microchips that manufacturers were able to achieve huge improvements in the production process — so much so, in fact, that the price of the Apollo microchip fell from $1,000 per unit to between $20 and $30 per unit in the span of a couple years." And then there is DARPA, the Defense Department's venture-capital arm, which has had an astonishing string of successes, helping fund stealth technology, the beginnings of the global-positioning system and, most famously, the Internet.

In the rest of the world, the role of the state is not controversial. While Americans continue to debate whether government should have any role in fostering innovation, the fastest-growing economies are all busy using government policy to establish commanding leads in one industry after another. Google's Schmidt points out that "the fact of the matter is, other countries are putting a lot more money into nurturing new industries than we are, and we are not going to win unless we do something like what they're doing. South Korea is a classic example. Who would have thought that South Korea could become a major iron and steel and shipbuilding country in the world? But some 40 years ago, in their organized way, they decided those are the industries they were going to go after. And there is now increasing evidence that Chinese companies are beginning to do things that are innovative — often with government assistance." There are many who believe that China's government-led innovation won't work, but at least for now, in industries like solar panels, wind turbines and high-speed rail, China is establishing a commanding lead.

Even those who look skeptically on direct support of specific technologies agree that basic research requires government funding. Ultimately, innovation cannot work without both significant government support and a vibrant and dynamic private sector that allows people to experiment, fail and try again. The U.S. remains the best place in the world to do just that, and despite our ideological bias, the U.S. government has actually spent hundreds of billions of dollars funding science, technology and even specific industries. The problem may be less the theory than the practice. Whereas once we funded the development of the computer chip, now we dole out money to agribusiness. Like so much else in Washington, funding for innovation has become less merit-based and more politicized.

Yet even if the U.S. can put together the combination of government policy and private initiative that lets innovation bloom, it won't solve all our current problems. The U.S. is climbing out of a recession in which corporate America is doing well but unemployment remains sky-high. Those with capital are prospering, but the average worker faces powerful challenges.

Will innovation solve this problem? That's not an easy question to answer. Consider Apple, now the second most valuable company in the world by market capitalization, just after ExxonMobil. Its innovative skills have led to rich rewards for its stockholders and managers, but if you compare it with the Taiwan-based firm Foxconn, which actually makes many of Apple's products, a crucial difference emerges. The companies have comparable revenues, but Apple employs about 50,000 people; Foxconn, 1,000,000. And there lies the key lesson. We need innovation urgently. But if we are to get the U.S. back to work, we need perhaps even more urgently to rebuild American education, reform our training system, revive high-end manufacturing, focus on new growth industries and rebuild our infrastructure. In fact, finding new ways to do these old tasks might be the greatest and most important innovation of all.

Restoring the American Dream: How to Innovate — a Fareed Zakaria GPS Special premieres on CNN at 8 p.m. E.T. and P.T. on June 5, 2011.

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