The Atlantic Home

This past week, I've look at the trends in U.S. innovation, commenting on Michael Mandel's powerful and compelling thesis about the deceleration and interruption of American innovation. With the help of my MPI team, I've tracked patent data since 1980, examined patent trends for U.S resident and foreign, non-resident inventors, and looked at the geographic distribution of patenting.

Overall, the trend in patenting is up - both in absolute numbers and controlling for population. Innovation has increased over the past decade, but not at the breakneck pace of the 1980s and 1990s. There have been two dips in patenting over the past decade - the first in the wake of the tech crisis of 2001 and the second, more recently, concurrent with the onset of the housing and financial bubbles and the subsequent economic crisis.

American innovation has shifted and become more geographically concentrated. Places like Silicon Valley and Seattle have seen a steady increase in innovation while older, industrial centers like Pittsburgh and Detroit have declined significantly. Innovation in large cities like New York and Chicago has stagnated. And American innovation has grown increasingly dependent on non-resident, foreign inventors.

Today, I focus on a broader historical question: How do economic crises affect American innovation? Does innovation slow down or speed up during periods of crisis?

Joseph Schumpeter long ago argued that crises were seedbeds of innovation and entrepreneurship. Innovations developed during crises generate the gales of creative destruction that launch new technologies, remake existing industries, and give birth to entirely new ones - setting in motion new rounds of economic growth. Economists Gerhard Mensch and Christopher Freeman have examined the historical timing of innovations, with Freeman famously arguing that the pace of innovation is actually relatively constant: Innovations bunch up during crises, only to be unleashed as economic conditions are restored.

The graph above is reproduced by economist Alfred Kleinknecht. It shows patent activity from 1750 to 1970. It tracks actual patents granted from 1901 to 2005. There are clear spikes in innovative activity during the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s.

The historical literature also suggests that crises are periods of significant innovation. Joel Mokyr and Naomi Lamoreaux have documented the rise of important innovations like the incandescent light, the steam turbine, and the transformer during the Long Depression. Economic historian Alexander Field finds the 1930s to be the "most technologically progressive" decade of the 20th century.

The chart below, compiled by the MPI's Patrick Adler based upon a reading of the historical literature, identifies some of the major innovations of the Long Depression and the Great Depression. If the past is any guide, we should expect some acceleration of innovation - and particularly of the dramatic innovation Mandel wants to see - in the coming decade.

The graph below, compiled by my colleague Charlotta Mellander, updates the story, charting patents granted per 10,000 people from the 1890s to 2007. The rate of innovation rose significantly after the Long Depression. It then dipped during the Great Depression before trailing off considerably during the World War II period. American innovation rebounded remarkably in the post-war period before trailing off in the 1970s. Since the early 1980s, however, American innovation has surged to record highs. There have been two dips in innovation in the 2000s. But as of 2007, innovation has fallen only slightly from its record pace.

So what's happened to U.S. innovation?

Like virtually every other facet of the economy, it has been - and continues to be - reshaped by globalization. As we saw on Wednesday, foreign non-resident inventors have become a key element growing U.S. patenting and a big piece of the American innovation system. Beginning around 1980, non-resident inventors essentially closed the gap with U.S. inventors. By the late 1990s, they had pulled even and were at times outpacing U.S. inventors. This is part and parcel of the globalization of the economy and the fact that the U.S. is the biggest market and most innovative nation on the planet.

This has altered the American system of innovation in a deep and fundamental way - changing it from a system that for the better part of a century was based on producing and commercializing innovations to one that is more attuned to attracting inventors and innovation globally. This shift is also reflected in the changing geography and regional concentration of U.S. innovation - the decline of old, integrated, regional innovations systems in locations like Pittsburgh and Detroit and the rise of new, globally focused clusters like Silicon Valley.

Innovation is no longer an American game - or, for that matter, a game of any one nation. The countries of the world are now all part of a much more global innovation system. Strategically, this shift means from organizing to generate new breakthrough innovations to organizing to absorb innovations coming from many different sources worldwide.

The U.S. is uniquely positioned because of its size, scale, universities, and venture capital system; its sophisticated end-users and customers; and its ability to attract global talent - to harness and reap the benefits of this global system. Its major innovation clusters reinforce this advantage and they will be hard to displace. That said, for the first time, the overall rate of American innovation has come to depend on foreign inventors. Anything that might slow the immigration or inflow of foreign inventors - or redirect their inventions and patents - would undoubtedly damage the rate of American innovation.

The key question for the future is less about the slowdown in innovation and more about which people and places will prosper in this new age of accelerating global innovation.

Yesterday, we looked at overall trends in U.S. innovation measured by patents. Today, we break out U.S. patents between U.S.-resident and non-resident or foreign inventors patenting in the U.S.

Numerous studies have shown that, over the past two or three decades, the role of foreign scientists, technologists, and entrepreneurs in U.S. innovation has increased. Recent research by AnnaLee Saxenian and Vivek Wadhwa and others finds that anywhere between a third and half of all Silicon Valley start-ups during the 1990s had a foreign entrepreneur or scientist on their core founding team. As I have previously argued, foreign-born scientists currently make up 17 percent of all bachelor's degree holders, 29 percent of master's degree holders, 38 percent of PhDs, and nearly 25 percent of American scientists and engineers. My earlier research shows that Japanese companies - and some European companies as well - chose to locate research labs in the U.S. to access a diverse mix of scientific talent they cannot attract in their home countries.

The graph below shows the overall trend in patenting for U.S.-resident and non-resident foreign inventors between 1980 and 2005. Non-resident (foreign) inventors have just about pulled even with U.S. inventors in patenting, and their rate of inventive activity more or less tracks that of U.S.-based inventors. But here again, even with two dips since 2000, the rate and level of innovation over the past decade remains up.

Clearly, foreign inventors have become a key feature of the U.S. innovation system. Without them the level of innovation would be much lower. Another way of saying this is that the American system of innovation has become increasingly dependent upon non-resident inventors. Foreign inventors patent in the U.S. to secure intellectual property protection in the large U.S. market. Clusters of sophisticated and demanding consumers and end-users help make the U.S. the place to be for high-end innovation, as Amir Bhidé points out in The Venturesome Economy.

While foreign patenting boosts the overall rate of innovation in the U.S., there is a considerable chance that these patented innovations are commercialized and produced off-shore, and thus that the U.S. economy will accrue less overall economic benefit from those technologies. While this is not direct evidence for Mandel's innovation interrupted thesis, it provides a possible mechanism that might limit the commercialization and overall economic impact of innovation in the U.S.

In a widely read cover story published earlier this month, Business Week's chief economist Michael Mandel asks, "To what degree has American innovation been 'interrupted'?" Mandel argues that the economic crisis is partly the result of America's failure to generate high-impact commercial innovations.

What if, outside of a few high-profile areas, the past decade has seen far too few commercial innovations that can transform lives and move the economy forward? What if, rather than being an era of rapid innovation, this has been an era of innovation interrupted?

The crux of his argument is that many, if not most, of the big breakthrough innovations that were supposed to occur over the past decade or so have failed to materialize. His article provides a raft of compelling examples of once-heralded innovations - in areas from biotech to micro-machines - that have simply not panned out. This failure to commercialize and diffuse these new breakthrough innovations - America's inability to set in motion the great gales of "creative destruction" identified long ago by Joseph Schumpeter as key to capitalist growth - he argues, is a key contributor to both the financial bubble and the economic crisis.

But since there is compelling evidence that the figures are overstated by the credit bubble and statistical problems, we can construct a plausible narrative for the financial bust that gives a starring role to innovation-or rather, to the lack of it. It goes something like this: In the late 1990s most economists and CEOs agreed that the U.S. was embarking on a once-in-a-century innovation wave-not just in info tech but also in biotech and many other technologies. Forecasters upped their long-run growth estimates for the U.S. economy. Consumers borrowed against their home equity, assuming their future incomes would rise. And foreign investors lent America money by buying up U.S. securities, assuming the country would come up with enough new products to pay off the accumulated trade deficit.

Mandel lists four areas in which America's recent performance has been lackluster: stock market performance in the pharmaceutical, biotech, and life-science sectors; declining real wages for highly educated workers; a mounting trade deficit in high-tech sectors (which grew from $30 billion U.S. surplus in 1998, turning into a $53 billion deficit by 2008); and little improvement in the death rate (which he sees as a measure of the failure of breakthrough medical technologies to materialize) as evidence for the failure of American innovation.

It's no secret that I'm a big fan of Mandel and I find his general thesis about lagging U.S. productivity and job growth over the past decade or so to be both intriguing and plausible. And since so much of my own work focused on the relationship between innovation and American competitiveness was flagging, I find myself particularly drawn to his most recent "innovation-interrupted" thesis.

My first book, The Breakthrough Illusion, written with Martin Kenney in 1990, argued that the U.S. system of venture capital-backed breakthrough innovation was skewed to encourage short-term super-returns from new breakthrough innovations, and was structurally ill-suited to capturing the longer-term wealth derived from developing these innovations into successful products and industries. That work drew upon the intriguing thesis of innovation theorist Henry Ergas, who argued that the U.S. had developed a shifting system of innovation geared to near-constant development of new products through new firms, as opposed to a deepening system (think of German cars) which continuously adds technology to upgrade existing industries. According to Ergas, the key to long-run prosperity lies in synthesizing both strategies - cultivating an economy which could deploy new technologies in new sectors while at the same time deploying them to upgrade and revolutionize old ones.

I opened my 2002 book, Rise of the Creative Class, with a time-traveler experiment. Someone traveling from 1900 to 1950 would be blown away by the varied technical marvels that surrounded them from televisions to airplanes. But while someone who time-traveled from 1950 to the 2000 would see a few new technologies, like the personal computer and the cell phone, he or she would likely be much more amazed by sweeping social changes. And in my 2004 book, Flight of the Creative Class, I argued that America's innovative edge in the late 20^th century was inextricably tied to its ability to attract foreign scientists, technologists, and engineers. The combination of mounting U.S. immigration restrictions and growing efforts by foreign countries to retain their own best and brightest (and attract others from around the world), I suggested, was an under-appreciated threat to U.S. competitiveness and prosperity.

In fact, I found Mandel's essay so compelling that I decided to take a look at the actual data. Mandel rightly says that we currently lack a comprehensive "innovation index" that tracks commercial innovation: "There's no government-constructed "innovation index" that would allow us to conclude unambiguously that we've been experiencing an innovation shortfall. Still, plenty of clues point in that direction."

True enough. But research into the economics of innovation has discovered at least one reasonable measure of innovation - patents. There are problems and biases with using patents as a measure of innovation, as economists who specialize in the subject have pointed out. Patents measure certain areas of technology more than others. In some areas of commercially important R&D, patents are rarely used. Other areas, including less commercially relevant ones, are awash in patents for minutiae. And patents are not synonymous with commercially relevant innovations. That said, patents do provide a consistent, broad-gauge indicator of the level and rate of innovation - one that can be tracked over long periods of time and be broken out by nation, city, and region, and by U.S. resident versus non-resident or foreign inventors.

With my Prosperity Institute team - Charlotte Mellander, Scott Pennington, Dieter Kogler, and Patrick Adler - I've taken a look at the trends in U.S.-patented innovations. In a series of posts this week, I will report our findings. Tomorrow we'll look at the trends in U.S. patents over time. Wednesday we'll explore patenting by U.S. resident versus non-resident (foreign) inventors. Thursday we'll examine the geographic distribution of innovation - tracking the rise of some innovative regions and the fall of others. And Friday we'll discuss the longer-run historical relationship between innovation and economic crises.