Is America losing the R&D race?

Short answer – no.

There is a considerable degree of angst, especially in political and media circles, that the United States is somehow falling behind in innovation. Often this is framed as falling behind China, but just as often the situation is framed as a retreat from perceived past glories. These stories appear every few years, and given all that is going on in the world today, we are not surprised to see the theme reemerge.

We thought of this recently when we saw this post making the rounds in social media. The article is an interview with two business professors who recently wrote this paper examining the ‘Structure of American Innovation’. The interview carries the kind of headline you need to put on posts these days, but we found the underlying analysis interesting. The point of the paper is not so much that America is not innovating, but rather that the way the US innovates has changed. Quick summary, in the 20th century, US innovation was largely driven by corporate research centers, which gave way in the 1980’s and 1990’s to innovation coming from universities and start-ups. Intuitively, this makes some sense. Institutions like Bell Labs, Xerox PARC and IBM, are no longer the places we look to for big advances.

The professors make a valid point that this has changed the kinds of problems the US solves. Small companies can mostly only tackle small problems, and universities may not have the resources to make big discoveries.

For those of us in the Valley, this transition strikes us a good thing. Those storied centers of corporate innovation are held up as case studies in commercial mis-application, with those companies largely unable to capitalize on the advances they made in their labs.

Our take is that US innovation is actually doing fairly well. If we were so far behind in technology why would China be trying to steal our technology (another topic that is poorly handled in the press, and a topic for another day)?

That being said we do think it is worth considering the structure of innovation. As an industry, and as a society, the US has developed its particular model for research. As with all things, this structure has led to certain trade-offs. There are clearly areas where we spend a lot of resources, while overlooking others. This is just the reality of finite resources. In itself it is not a bad thing, but it is worth occasionally thinking through those trade-offs. Are there areas that we are missing? Are there fields that require a coordinated national research drive? Should we build another method for creating new techology?

This obviously touches on our recent discussion about semiconductors (and here). For better or worse US technology investors has collectively decided to stop investing in semiconductors, cutting off an important source of innovation. Commercially, this made sense several years ago, but we would argue it is worth re-considering. The US has also re-discovered an urgency for investing in biotech. Job boards are now filled with listings for biotech firms as those companies embrace a surge of investment. A family member does sales for a company that supplies biotech labs (proverbial picks and shovels) and she has never been busier.

For those of us close to hardware and electronics, the last ten years has been frustrating as companies that push the frontiers of the laws of physics were valued orders of magnitude less than messaging app companies.

The problem with that collective assessment is that if you examine each individual investment decision they each make sense in their own context. Would you rather invest $5 million in an app that can generate billions in revenue, or $200 million for a chip that sells for $0.10 a piece?

If we really think the US needs to shift its R&D focus, it needs to consider ways to shift decisions at that level. The US has done pretty well without a massive coordinated Technology Industrial Policy, any move to change that should be done with a cautious eye towards second and third order consequences.

We are gradually coming around to the idea the US should reconsider what it prioritizes in technology at a national level. That being said, the way we actually implement any such change, should be considered very carefully.

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