bridges vol. 36, December 2012 / Innovation Matters
In September 2012, my colleague Robert Atkinson and I released a new book, Innovation Economics: The Race for Global Advantage. The book argues that there is a fierce competition underway between nations to achieve the highest levels of innovation-based economic growth, as countries seek to launch, scale up, or attract companies in the highest value-added sectors of economic activity that can support high-skill, high-wage jobs for their societies.
We envision this "global race for innovation advantage" as one in which virtually all nations win, with higher productivity and per capita incomes, new and better products and services, and a better quality of life for all. We picture a world in which the potentially catastrophic problems of hunger, disease, and environmental degradation are effectively tackled, reducing the risks of wars over scarce resources. In our vision, transformative technological and scientific advances help unite nations and people in common pursuits.
While it's not clear that we can achieve this vision, there is really no compelling reason why we can't. Even if there is an inherent "speed limit" for innovation that we can't exceed, the world is not anywhere close to approaching it. However, at the end of the day, maximizing innovation requires the will and the resources to do the right thing. Unfortunately, too few nations are organized in ways to maximize innovation. Nations underinvest in innovation because many of its benefits spill over to the rest of the world. Too many nations are focused on "innovation mercantilism": zero-sum, beggar-thy-neighbor policies such as stealing intellectual property, discriminating against foreign technology firms, requiring foreign firms to transfer technology to obtain market access, or manipulating currency. While these policies can sometimes boost innovation in the countries that practice them, they reduce innovation elsewhere and violate the spirit and/or letter of the law of the global trading system. Meanwhile, the de facto system of global governance is designed neither to spur nations to do the right thing nor to deter nations from doing the wrong thing. As a result, the world produces significantly less innovation than is possible and is needed. The major challenge for the community of nations, therefore, is to create a robust global innovation system with considerably higher rates of win-win innovation and considerably lower rates of win-lose innovation.
In short, as we write in the concluding chapter of Innovation Economics, if we are to create a robust global innovation economy, the most important place to start is with the recognition that we need an international innovation policy framework. In short, we need a new Bretton Woods for the global innovation economy; the following section lays out three key steps for getting there.
Step One: Develop a New "Geneva Consensus" Around Trade
The prevailing consensus today among leading global governance institutions such as the International Monetary Fund (IMF), the World Bank, the World Trade Organization (WTO), and others – often called the "Geneva Consensus" – is based on the 200-year-old economic theory of comparative advantage, which holds that each nation has a "comparative," not absolute, advantage in production of certain products or services. Even when one country is superior to another in the production of two different goods: If that country focuses production on the good for which it has the highest relative advantage, and the other country focuses on the second good, both countries will benefit from trade.
This has become economic religion for holders of the Geneva Consensus. Removing trade barriers – usually viewed as tariffs – in the name of free trade is their top priority. To be sure, reducing barriers to free trade would help boost global GDP, but actually not by that much, especially compared to policies that would boost innovation. Put another way, the problem with the Geneva Consensus is not so much that free-trade theory is necessarily wrong, but that fighting for the removal of tariffs and trade barriers is a less important priority than promoting global innovation. As Joseph Schumpeter might have argued: Dynamic efficiency (innovation) and productive efficiency (productivity) are much more important, domestically and globally.
Step Two: Reform International Institutions
The second step is to revamp the mission of existing international bodies, not only to better support sustainable global innovation but also to fight against innovation mercantilism. This means stronger enforcement by global bodies like the WTO against beggar-thy-neighbor mercantilist strategies. It means no longer promoting export-led growth as a key solution to development. It means tying assistance to steps taken by developing nations to move away from negative-sum mercantilist policies. It means rewarding countries whose policies are focused on spurring domestic productivity instead of protecting the status quo or growing solely by exporting (or limiting imports).
- Reform the International Monetary Fund. The IMF should not tie future financial assistance to whether governments cut spending to get budgets under control (its current practice), but instead to whether they are putting in place policies to drive domestic innovation and productivity. It should also call out and cease lending to countries that manipulate their currencies.
- Reform the World Bank. For its part, the World Bank should make a firm commitment that it will stop encouraging policies designed to support countries' export-led growth strategies. At the same time, the World Bank needs institutional innovation to begin seeing its mandate as achieving a more globally balanced international economic system. The G20 countries, as the primary sponsors of the World Bank, must tackle this issue head-on by insisting that the Bank develop a new strategic plan for completely revamping its approach with a focus on win-win innovation policy.
- Reform the World Trade Organization. For its part, the WTO needs to worry less about preserving the myth that the current global trading system is based on free trade, and more about aggressively attacking innovation mercantilism. In addition, the opaque, Geneva-based WTO is long overdue for becoming more transparent and open. For example, the WTO routinely classifies certain documents as internal rather than official WTO documents, allowing them to remain hidden from the public.
Enacting these true innovation policies risks the opposition of powerful interests: unions and workers who may be displaced; domestic producers, including small businesses, who enjoy cozy relationships and low levels of competition; able-bodied individuals who are paid for not working; and government bureaucrats whose top-down control is challenged.
Yet it is only by spurring competition, allowing new business models to take hold (e.g., allowing big-box retailers to displace inefficient mom-and-pop retailers), and deploying the best production tools – often by increasing the use of information technology (IT) – that nations will see rapid increases in standards of living. But without carrots and sticks to move in this direction, some nations will continue to take the easy way out: innovation mercantilism. Nations that work in the direction of sustainable innovation should be rewarded with support from global institutions; nations that do not shouldn't receive support from the global community.
Step Three: Create a Global Science and Innovation Foundation
Finally, we need more capable international institutions to support global science and innovation. Now more than ever, the benefits of research flow throughout the world. As a result, nations that set aside some of their current consumption to invest in science and research are helping not only themselves but the entire world. But there is less investment in science and research than is globally optimal because some countries free ride off of others' investments in research. We see this in Europe, for example, where most science investment is the responsibility of individual nations rather than the European Commission. As a result, the European Union as a whole invests less in research as a share of GDP than does the United States. Moreover, there is less investment than warranted on challenges that are global in nature. We see this in particular on research that could produce non-carbon energy sources or address future potentially pandemic diseases. Leading nations should therefore establish a Global Science and Innovation Foundation (GSIF). The mission of the GSIF would be to fund scientific research around the globe on key global challenges and, in particular, support internationally collaborative research. For any nation to be eligible to receive funds, it would have to commit one-tenth of one percent (0.1%) of its GDP in funding and be certified by the GSIF (with guidance from the IMF) as a nation not committed to innovation mercantilism.
In conclusion, the global race for innovation advantage can be one in which all people and all countries win – but only if everyone is playing by the right set of rules.
The author, Stephen Ezell, is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF), with a focus on international information technology competitiveness and national innovation policies.