The Future of Innovation: Can America Keep Pace?

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Horacio Salinas for TIME

"The first step to winning the future is encouraging American innovation." That was Barack Obama in his State of the Union address last January, when he hit the theme repeatedly, using the word innovation or innovate 11 times. And on this issue, at least, Republicans seem in sync with Obama. Listen to Mitt Romney or Newt Gingrich or Mitch Daniels and the word innovation pops up again and again. Everyone wants innovation and agrees that it is the key to America's future.

Innovation is as American as apple pie. It seems to accord with so many elements of our national character — ingenuity, freedom, flexibility, the willingness to question conventional wisdom and defy authority. But politicians are pinning their hopes on innovation for more urgent reasons. America's future growth will have to come from new industries that create new products and processes. Older industries are under tremendous pressure. Technological change is making factories and offices far more efficient. The rise of low-wage manufacturing in China and low-wage services in India is moving jobs overseas. The only durable strength we have — the only one that can withstand these gale winds — is innovation.

Even more troubling, there are growing signs that the U.S. no longer has the commanding lead it once did in this area. Two reports from the Boston Consulting Group and the Information Technology & Innovation Foundation (ITIF) that use hard measures such as spending on research, patents and venture funding as opposed to surveys find that the U.S. ranks not No. 1 but No. 8 and No. 6, respectively. In fact, the ITIF rankings have a category that measures how much a country has improved its innovation capacity from 1999 to 2009, factoring in measures like government funding for basic research, education and corporate-tax policies. Of the 40 countries analyzed, the U.S. came in dead last.

What is innovation? We don't really have a good fix on the concept. We know it when we see it. But this much is clear: it encompasses more than just scientific or technological breakthroughs, as becomes apparent when you look at which companies are considered the most innovative. In the world of business rankings, it is very rare for a company to rank first in every survey, since the criteria often vary greatly. Yet when tackling innovation, one company, Apple, utterly dominates the lists, whoever puts them together.

So how would one define Apple's innovations? It is not a company that focuses on pathbreaking science and spews out new inventions and patents. The 2010 Booz & Co. ranking of companies by their expenditures on research and development places Apple 81st. As a percentage of its revenue, the company spends less than half of what the typical computer and electronics company does and a fifth of what Microsoft spends. Apple's innovations are powerful and profound, but they are often in the realms of design, consumer use and marketing. This is hardly unusual. In fact, the application of technology in service of a consumer need or business objective is what true innovation always has been.

Viewed from a historical perspective, that combination at the heart of successful innovation becomes clear. Len Baker, one of the founding fathers of the Silicon Valley venture-capital industry, says, "My favorite example is Isaac Merritt Singer, who invented the first commercially successful sewing machine. The real benefit to society was that he was the first person to sell to women, because prior to this it was assumed that women couldn't operate machinery. His company invented the installment plan and the trade-in. That's innovation. Think of eBay: eBay didn't create new technology. It used technology and revolutionized the way people do things." This idea of innovation as a new business process is of course older than modern capitalism itself. The system of accounting called double-entry bookkeeping, invented in Renaissance Italy, was powerfully connected to the development of trade and commerce. New ideas in all kinds of fields can fuel economic growth.

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