Race to Innovate

Competitiveness, Manufacturing, and Trade Policy Analysis

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Don’t Blame ICT for Manufacturing Offshoring

During the 2000s, globalization took millions of jobs from the United States. Some have been quick to associate this job loss with the technology that ostensibly made it possible, chiefly the adoption of ICT that allowed for global connectivity. So, would the United States have been better off if it had simply never invested in ICT in the first place?

There are those who would love to somehow put the technology introduced by the ICT revolution back in the box. But a new study shows that doing so would have detrimental impact on the economy. Yes, in some cases ICT investment introduced the tools which allowed companies to outsource jobs. But, as new paper, Does ICT Investment Spur or Hamper Offshoring?, finds, the same ICT investment enabled productivity gains that kept companies at home.

Of course, it is difficult empirically to determine whether ICT investments increase the likeliness of offshoring, as causality is difficult to determine. To address this problem, authors Luigi Benfratello, Tiziano Razzolini, and Alessandro Sembenelli examined small and medium-sized Italian manufacturing firms with varying access to local broadband facilities, a random variable that was used

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U.S. Companies Continue to Suffer From the High Cost of Corporate Taxation

It is common wisdom that the world economy is becoming increasingly competitive. This puts enormous pressure on U.S. companies to lower their prices. Anything that adds extra cost to the production of U.S. goods and services threatens their viability against foreign firms. It is also common knowledge that the United States has the highest corporate tax rate in the developed world. When state and local jurisdictions are added, American companies face an average statutory rate of 39.1 percent. The weighted average of other OECD countries is 29 percent and the rate in the United Kingdom, where a lot of U.S. headquarters are ending up, is 21 percent.

Some opponents of corporate rate reduction argue that this comparison is misleading, because effective tax rates, the amount of tax that companies actually pay divided by their profits, are much lower, and in some cases even negative. The implication is that U.S. companies do not suffer from a disadvantage and tax rates are not high enough to discourage economic activity.

A new study by PwC compares the effective tax rates of 320 international companies in six industries by looking at their annual reports.

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ICT

How ICT Can Drive Growth in Emerging Economies

I had the honor of giving a keynote presentation on August 6 at the Fifth Ministerial Conference on the Information Society in Latin America and the Caribbean in Mexico City (video here). Hosted by the United Nation’s Economic Commission for Latin America and the Caribbean and the Government of Mexico, the conference was attended by government officials and others involved in information and communications technology (ICT) policy in the region. The focus was on how the region can coordinate more effectively on ICT policy and how Latin American and Caribbean countries can learn from each other. Three main things struck me during the conference: there was a distinct focus on trying to create the next Silicon Valley, an emphasis on fostering small businesses, and competing visions of opportunity versus growth. Although I have to say these were not surprises, as I have found that many policymakers around the world hold similar views on these topics.

Discussion turned repeatedly to the question of how to create “the next Silicon Valley,” rather than how to create the next ICT-enabled economy. In other words, too many policymakers focus on trying to

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‘Innovation Box’ Proposal Would Stimulate U.S. R&D and Innovation

In recent years, the United States has become less competitive in retaining and attracting globally mobile capital. That’s in large part due to an uncompetitive tax code that features the highest statutory corporate tax rate among OECD countries; a worldwide, as opposed to territorial, tax system; and an intermittent research and development (R&D) tax credit that has fallen to just the world’s 27th most generous, behind even Brazil, China, and India.

It’s high time for Congress to begin a serious reexamination of U.S. tax policy and to incorporate innovative approaches that spur greater levels of R&D, innovation, and investment by enterprises operating in the United States. One proposal that ITIF has long championed is the “innovation box” (or “patent box”). So named because it is implemented through a check box on a tax form, the policy provides favorable tax treatment for revenues generated from newly developed intellectual property (IP). As ITIF explained in its 2011 report “Patent Boxes: Innovation in Tax Policy and Tax Policy for Innovation,” these provisions differ from—and should be seen as a supplement to—R&D tax credits in that they provide firms with

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digital

Data a Key Driver of Transatlantic Economic Growth

The Transatlantic Policy Network hosted an event on Capitol Hill yesterday to discuss the data revolution in the transatlantic marketplace. The discussion was timely, for the reality is that data is the key commodity in today’s knowledge-based economy. In fact, a recent study by Finland’s TEKES finds that, by 2025, half of all value created in the global economy will be created digitally. Meanwhile, half of all global trade in services depends on access to open, cross-border data flows. Indeed, a wide range of industries—from manufacturers to miners, to banks, hospitals, and grocers—depend on the ability to move data across borders and/or analyze it in real-time as a fundamental component of their supply chains, operations, value propositions, and business models, as ITIF writes in Cross-Border Data Flows Enable Growth in All Industries. And this is as true for small businesses at it is for large—a 2014 study found that 60 percent of U.S. and European businesses with 50 or fewer employees regard data analytics as important to their enterprises’ success.

Moreover, the competencies of countries, and their enterprises therein, at extracting value and insights from data is instrumental to

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Response to the Pope’s Encyclical on Global Warming: Markets and Technology Are the Solution, Not the Problem

It is difficult to know what to make of Pope Francis’ recent encyclical, Laudato Si’. Although formally devoted to global warming, the science and policy of climate change is mentioned only in passing. None of the encyclical’s 172 footnotes cite scientific or economic works. The facts associated with neither the immediate topic nor with broader ecological concerns are ever examined in any depth. Instead, readers are treated to a lengthy discussion of church philosophy on the relationship between man, God, and nature, illustrated by numerous quotations from past church leaders. Although critics have faulted the encyclical for many things, its language is too general and enough caveats are thrown in that such attacks seem overdone. The real problem is that, other than love each other and live more simply, it is difficult to know what Pope Francis would have us do differently.

The Pope is surely correct to point out the many instances where short-term profit for a few has produced environmental pollution whose cost is borne by the many. His criticism of materialism, defined as the love of things rather than people or values, also rings true. There is

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TPP Poised to Improve, Not Diminish, Health Outcomes Across Asia-Pacific Nations

In a not-so-shocking revelation last week, a leaked draft of the Trans-Pacific Partnership (TPP) intellectual property (IP) chapter turned up the fact that…surprise…the United States is fighting for its domestic industries in a trade agreement.

No real news there, especially since that’s exactly what our trade representatives should be doing, namely bringing home the strongest possible deal that protects and creates jobs and fosters the kind of innovation that will secure 21st century prosperity for Americans. What is extremely disconcerting, however, is that special interest groups and the generic drug industry are lobbying for drastic cuts to intellectual property protections for innovative medicines that could have lasting consequences for both global patient health as well as U.S. jobs and economic competitiveness.

These groups are (wrongly) asserting that the IP provisions being negotiated in the TPP will weaken competition from generics and raise drug prices by establishing protections that go beyond U.S. law. But, as usually happens, groups that oppose free trade agreements never let minor inconveniences like facts get in the way of their arguments.

For instance, it’s telling when the head of one of the world’s largest generic

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Dancing in the Streets

They’re Dancing in the Streets in Beijing and Berlin

Congressional authorization of the U.S. Export-Import Bank (Ex-Im Bank) is set to expire this evening, ending 81 years of continual and effective operation in the service of American exporters. The Bank has played a critical role in supporting the competitiveness of America’s traded-sector enterprises—that is, those competing in global markets—by stepping in to provide financing or insurance for export transactions that might not otherwise occur and by leveling the playing field for U.S. exporters by matching the credit support that other nations provide for export transactions.

Yet while some in Congress are pleased that they’ve “beat back the scourge of crony capitalism,” those who are truly giddy with delight are to be found in the capitals of the more than 80 countries that operate export credit agencies (ECAs)—from Beijing, to Berlin, to Brussels—and at the headquarters of businesses both small and large in such countries. That’s because, much to the chagrin of those in Washington who insist on not recognizing that America’s traded-sector enterprises are locked in fierce competition with foreign businesses spanning the globe, the ECAs of America’s competitors aren’t going to close up shop overnight in solidarity with

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transportation

DRIVE Act Drives in Right Direction; Yet Intelligent Transportation Systems Still Underfunded

The U.S. Senate Environment and Public Works Committee introduced a new bipartisan surface transportation reauthorization bill this week: the Developing a Reliable and Innovative Vision for the Economy (DRIVE) Act. And as ITIF called for in a May 2015 report, From Concrete to Chips: Bringing the Surface Transportation Reauthorization Act Into the Digital Age, the six-year reauthorization proposal does place increased policy emphasis on intelligent transportation systems (ITS)—particularly through a ground-breaking “Transportation Innovation” title which includes numerous provisions incentivizing the use of innovative transportation technologies.

That said, and despite this progress, the proposed bill continues to significantly underfund ITS research, development, and deployment over the next six-year period. This despite the fact that intelligent transportation systems—the application of information and communications technologies (ICTs) to bring actionable, real-time intelligence to every actor and asset in a transportation network—have a cost-benefit ratio at least 9 to 1 over investments in traditional highway infrastructure.

With regard to research and development (R&D), the DRIVE Act keeps ITS research funding constant at $100 million annually. While the Act does provide an additional $72.5 million annually for the University Transportation Centers (UTC) program to fund

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No Growth Without Labor Productivity

Last week the Bureau of Labor Statistics handed down some pretty dismal news for American manufacturing—news that was largely overshadowed by the façade of job growth numbers. Yes, American manufacturing is adding jobs. But our labor productivity numbers have fallen.

Labor productivity is simply how many goods can be produced with an hour of work and matters because along with the size of the labor pool, it determines the overall output of an economy. Factors such as technology and capital investment let workers produce more than they could on their own. In the first quarter of 2015, the number of American hours worked (a proxy for the number of workers) grew at a 1.5 percent annual rate. However, the real value of the goods America produced declined at a 1.6 percent annual rate over the same period. And that’s very dangerous, especially because that decline extends to the manufacturing sector.

Manufacturing labor productivity is actually down by 1 percent in the first quarter. And, while the first quarter findings may be the result of a measurement issue, multi-year trends show labor productivity growth much slower than our competitors. In

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