American innovation is in trouble

The world is impressed with the United States these days. On recent trips to Europe and Asia, I kept hearing praise of the country’s innovation and entrepreneurship. But a set of new studies suggests that the glittering examples of Facebook, Snapchat and Uber are deceptive. American innovation is in trouble.

“Over the past 30 years, the rate of start-up formation in the United States has slowed markedly, and the technology industry has come to be dominated by older companies,” writes Robert Litan in the current issue of Foreign Affairs. In 1978, start-ups — companies less than a year old — made up almost 15 percent of all U.S. companies. But by 2011, that figure had slumped to 8 percent. “For the first time in three decades, business deaths exceeded business births,” notes Litan.

U.S. companies are also getting older. Litan notes that “the proportion of U.S. companies considered mature, meaning at least 16 years old, rose from 23 percent of all firms in 1992 to 34 percent in 2011.” The problem with this trend is that, historically, older firms are more risk-averse, rigid and incrementally innovative than young ones.

Litan’s solutions are sensible and bipartisan: Let in more talented immigrants who combine technological prowess with an appetite for risk — and who are disproportionately likely to start new firms. Regularly review and thin out regulations that make it difficult for the average person to start a company. Make it easier for people to raise money for their ideas over the Internet. And maintain near-universal health care so that people can risk leaving an established company without worrying about their family’s health.

Innovation is partly about entrepreneurship but also about technology. And there are some, such as billionaire entrepreneur Peter Thiel, who argue that, despite the hype, we don’t actually live in innovative times. Founders Fund, Thiel’s venture capital firm, put it pithily: “We wanted flying cars, instead we got 140 characters,” referring to Twitter.

I think there’s strong evidence that information technology has been utterly transforming and will continue to transform, moving into industries such as health care and education. But my worry is that the rise of IT was the fruit of many years of investment. We are eating seed corn but not laying the groundwork for the next great technological revolutions.

If you ask people in Silicon Valley what makes it work, they will talk about many things — the ability to fail, the lack of hierarchy, the culture of competition. One thing almost no one mentions is the government. And yet, the Valley’s origins are deeply tied to government support. The reason there were so many engineers in California in the 1950s and 1960s was because large defense companies had attracted them there. Most of the legendary start-ups that fueled the computer revolution — Fairchild Semiconductor, Intel — got off the ground largely because the military, and later NASA, would buy their products until they became cheap and accessible enough for the broader commercial market. GPS, the technology that now powers the information revolution, was developed for the military.

And then there was government funding for research, which is sometimes thought of simply as large grants to universities for basic science but often was far more ingenious. My favorite example comes from Walter Isaacson’s fascinating new book, “The Innovators.” In the 1950s, the U.S. government funded a massive project at MIT’s Lincoln Laboratory, employing equal numbers of psychologists and engineers who worked together to find ways “that humans could interact more intuitively with computers and information could be presented with a friendlier interface.” Isaacson traces how this project led directly to the user-friendly computer screens of today as well as ARPANET, the precursor of the Internet.

Federal funding for basic research and technology should be utterly uncontroversial. It has been one of the greatest investments in human history. And yet it has fallen to its lowest level as a percentage of GDP in four decades. Meanwhile, the rest of the world is catching up in entrepreneurship and research. A real start-up culture is emerging in Sweden, Israel, Beijing and Bangalore. China is on track to surpass the United States in spending on research and development.

But there is hope. Ajay Piramal, a thoughtful Indian businessman, said to me, “I think one of the reasons that the United States is so successful is that it constantly criticizes itself. All that criticism makes sure that you never get complacent.” So while foreigners praise U.S. innovation today, Americans should set about making sure that there is innovation tomorrow as well.

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