Race to Innovate

Competitiveness, Manufacturing, and Trade Policy Analysis

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Tax Proposals Attempt to Bridge the “Valley of Death” for Small Research Firms

A new coalition of trade associations, The Coalition of Small Business Innovators, has developed two innovative tax reform proposals designed to help small research companies attract more investors, even if they are many years away from profitability. These proposals would allow passive investors to take advantage of losses and research credits generated by the company and allow companies to carry net operating losses forward even when they raise new financing. The former proposal has already been included in broader bills aimed at boosting innovation and economic activity. If enacted, the proposals could increase investment in small, research-intensive firms by $14.1 billion and create 72,000 jobs in eligible companies.

Although the U.S. financial system is the most sophisticated in the world, it still contains at least one significant gap. Small, capital-intensive companies often find it very difficult to raise the additional capital needed to go from start-up through the long development phase until they are near enough to profitability to conduct an initial public offering or be attractive to a prospective buyer. This period is commonly known as the “valley of death.” Firms in this position may have a very

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Time for America to Throw in the Competitiveness Towel

In 1871, America became the largest economy in the world. 144 years later we need to admit that while we’ve had a good run, it’s time to let other countries have their turn. China just overtook us as the largest economy last year. And other nations, like India, are on their way up.

So I say, let’s stop being selfish. We can get used to being number 2, or even number 20. We’re America after all, we can do anything, including lose gracefully.

Besides we don’t want to hurt other nations, especially those poor ones. We have lots more money than the Chinese and Indians. Why then are we trying to compete with them and not letting them have our high wage industries that they need more than us. If they want to take our aerospace, machinery, heavy equipment, computers, software and life sciences industries, who are we to say no, even if they use unfair methods to win. After all they are poor, so it’s okay for them to cheat.

Now it is true, as China specialist Michael Pillsbury writes in The Hundred Year Marathon, that China has

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What Creates Jobs? Welcoming STEM Workers

Politicians talk frequently about job creation. But what actually creates jobs is a subject of intense debate. Do we need more public spending? Less? Fewer regulations? Smarter regulations? The answer usually depends on the audience and ignores the deeper questions. What kind of jobs are we creating? Do other jobs get destroyed? Would high-skill immigrants take a job from an American or create a new one for him or herself?

A recent report, Technology Works: High-Tech Employment and Wages in the United States, from the Bay Area Council Economic Institute, a trade organization from an area that knows a thing or two about facilitating economic growth, sheds light on these questions by highlighting a tried and true method for creating jobs: attracting and employing technology workers. When a city, community, or region employs a technology worker, this engenders a multiplier effect on employment in the local economy. In fact, the Bay Area Council’s study finds that every one job in the high-tech sector—defined as those most closely related to science, technology, engineering, and math (STEM) fields—leads directly to 4.3 jobs in local goods and services industries across all

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Study of Patents Shows Importance of Fed-Funded Research

A new report from Battelle based on methodology from the Academy of Radiology Research shows how federal R&D funding succeeds in producing patents. The report examines essentially all federal R&D, including not only the Department of Defense and the National Institutes of Health but also the Department of Energy, the National Science Foundation, NASA, and other agencies. It finds that, per patent, public-sector agencies provide a return comparable to private-sector ones—or even cheaper. Recent public sector budget cuts, therefore, can be expected to significantly hurt our scientific progress.

The agencies vary significantly in terms of how productive they are and how successful their patents are. Some agencies in particular, such as the National Institute of Biomedical Imaging and Bioengineering (NIBIB) have exceptional records for producing research that is widely useful: NIBIB is estimated to spur an additional $578.2 million, or 25 patents, for every $100 million in R&D expenditures. The DoD and NASA, on the other hand, are less efficient at producing patents at only around 2-3 patents per $100 million in R&D expenditures. (although, as the report notes, defense spending is more likely to be classified and thus not

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ip

Global IP Infringement’s Significant Cost to the U.S. Economy

“Abdominal pain comes first. After three days, the kidneys fail. After five days, neurological dysfunction leads to paralysis and breathing difficulties. Patients who survive will be dialysis-dependent for the rest of their lives. But in the end, most will die.” That’s from ITIF Trade Policy Analyst Michelle Wein’s gripping monograph, The Devil Wears Counterfeit Prada—And Sells Fake Glycerin: The True Cost of Global Trade in Illicit Goods, which leads by describing the mass poisoning of 100 Panamanian children in 2006 caused by Chinese exports of counterfeit glycerin that was really poisonous diethylene glycol. Unfortunately, that’s just one example: each year, approximately 1 million people around the world die from counterfeit drugs, which account for 30 percent of global drug sales. And that’s just the damage from one category of counterfeited products. It doesn’t even count the damage caused by counterfeit foods, pet medications, electronic products, or the over 1,800 cases of suspected counterfeit electronic parts recently found across a wide range of U.S. weapons systems, according to a 2012 Senate Armed Services Committee report. In fact, the total value of the global counterfeit goods trade now tallies $1.8 trillion

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Securing the Competitiveness of America’s Export Industries

With Export-Import (Ex-Im) Bank reauthorization once again before Congress—its current authorization expires on June 30, 2015—it’s a good moment to take stock of the critical role the Bank plays in ensuring the competitiveness of America’s traded sector companies and industries. As the official export credit agency of the United States, the Ex-Im Bank plays a fundamental role in ensuring the global competitiveness of U.S. exporters, as ITIF described in its 2014 report The Export-Import Bank’s Vital Role in Supporting U.S. Traded Sector Competitiveness. Specifically, the Ex-Im Bank fills two key roles. First, it provides financing—in the form of loans or loan guarantees—to foreign purchasers of American products and services for export transactions that might not otherwise occur when private commercial lenders are unable or unwilling to provide financing to foreign purchasers of U.S. exports. Second, the Bank levels the playing field for U.S. exporters by matching the credit support that other nations provide, ensuring that U.S. exporters are able to compete based upon the price and performance of their products.

Put simply, the Bank makes possible U.S. exports that otherwise would not occur without its assistance. In FY 2013,

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You’re Ruining It for the Rest of Us: Ecuador and Intellectual Property

It appears that the global club of those who do not adequately appreciate intellectual property (IP) has gotten a new member: Ecuador. In the past few years the IP environment inside that small South American nation has deteriorated quite significantly, especially with regard to the protection of pharmaceuticals and biologics. And as the situation continues to worsen, those of us around the world paying attention are probably all thinking the same thing: You’re ruining it for everyone else.

Indeed, Ecuador’s weakening life sciences IP situation is just one of a long line of countries doing so around the world, including Canada, India, Nigeria, the Philippines, and South Africa. Ecuador’s decision to weaken its environment for life sciences IP risks perpetuating this global contagion effect. For example, since 2010 the nation’s main IP agency (responsible for ensuring IP rights, including enforcement and promotion) the Ecuadorian Intellectual Property Institute, has granted nine compulsory licenses (CLs) with 12 applications still pending. Six of those nine CLs were issued in 2014 alone, including one for Pfizer’s kidney and gastrointestinal cancer medication, Sutent. According to the World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights

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New Administration Budget has Smart Proposals for Boosting R&D

The U.S. corporate tax system hasn’t had a major overhaul since the early 1980s, and it’s getting long in the tooth. One part that is particularly dated is the research and experimentation (R&E) tax credit provision. The new 2016 administration budget makes some important changes to the R&E credit. The credit was first implemented as a two-year trial run over 30 years ago in 1981, and has been renewed continually since then, eventually adding an updated “alternative simplified credit” (ASC) as the old credit became too unwieldy in many instances. Despite proven success as shown in many academic studies, however, the credit is continually forced to be renewed. The new administration proposal takes the obvious step of making the credit permanent, eliminates the outdated “traditional” credit making a stronger ASC the sole form of the credit, and incentivizes R&D in universities startups by increasing the amount of the credit that companies can claim for outside R&D expenditure.

While the R&E credit has evolved over the past three decades, both its core structure and its temporary span have stayed the same. It is clearly out of date: the law still

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R&D Credits Essential for Competitiveness: New Evidence

A new SSRN paper finds that research and development (R&D) helps manufacturers keep ahead of competition from imports. U.S. manufacturing firms in industries with strong import competition from China fared better 50 percent better when they had larger stocks of capital used for R&D. While this finding is intuitive, it provides an important piece of evidence that reiterates a critical point about the U.S. economy: international competitiveness is extremely important and smart R&D policy (including tax credits) is a key method of maintaining it.

The authors Johan Hombert and Adrien Matray use granular industry-level data on imports from China and show that these imports have a significant impact on the performance of U.S. manufacturing firms. They then examine whether this impact changes depending on how much R&D capital firms have. In order to make sure the R&D capital isn’t related to other factors, they use state-level changes in R&D credit policy during the 1980s.

Their results here show that firms that had access to cheaper R&D and were thus more likely to acquire more R&D capital had an easier time “climbing the quality ladder” and staying competitive in the face

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Congress Needs to Prioritize TPA Passage

Today, U.S. Trade Representative Michael Froman will address the 114th Congress regarding the necessity of passing Trade Promotion Authority (TPA) as a predicate for completion of the ambitious U.S. trade agenda. TPA allows the President to “fast-track” trade agreements for approval or disapproval by Congress; essentially, TPA asks the House and Senate to accept or reject a trade agreement, without amendment, within 90 days of its submission to Congress by the President. The process enables the United States to negotiate more beneficial trade agreements with other countries, in part because of the reduction in approval time compared to other pieces of legislation (that often languish in committee markup) and because it incentivizes foreign countries to make good faith trade negotiations with the United States, since they know that Congress cannot rewrite the deal.

Presidents need fast-track negotiating authority because the simple reality is that finding consensus on trade agreements becomes nearly impossible if all 535 members of Congress get a chance to rewrite the terms of trade agreements American officials have spent painstaking years negotiating with multiple foreign partners. And as Representative Froman wrote in a recent Foreign Affairs

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