Race to Innovate

Competitiveness, Manufacturing, and Trade Policy Analysis

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New Report on R&D Tax Incentives Shows Best Practices

Earlier this year the European Commission released a substantial report on R&D tax credits throughout the EU and several other OECD countries including the United States and Japan. R&D tax credits have been widely adopted across the developed world since the United States introduced the Research and Experimentation tax credit in 1981: only two countries in the EU do not have tax policies intended to encourage R&D.

The report is a thorough meta-study looking at the existing economics literature and available data on R&D-focused tax policy, including the impact of R&D tax policies on R&D expenditure, innovation, employment, productivity, and other factors. It also covers the literature on how corporate tax policy can affect the location of R&D and patents. Finally, the report examines the details of various tax policies and benchmarking them based on what they determine to be best practices.

The report makes a number of facts clear. First, despite a broad range of findings, “the vast majority” of studies surveyed show that R&D tax incentives are effective, with the most recent (and rigorous) studies finding that a 10% in the user cost of R&D results in a

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The Leaky STEM Pipeline Can’t Be Patched with Higher Wages

Even with the economic recovery, recent graduates have it rough. Unemployment among young people remains high and wages remain depressed. Frequently, graduates accept low-wage positions that do not utilize their degrees.

However, one group of recent graduates—those in STEM fields—has it easier than their peers. For these graduates with degrees in fields such as computer science and engineering, high-paying jobs are plentiful. Eighty-one percent of STEM grads hold jobs closely related to their degrees, compared to 72.5 percent among all graduates. Median starting salaries for computer science and engineering are estimated at around $67,300 and $64,400 respectively, 80 percent higher than starting salaries for humanities and liberal arts majors. Moreover, most sectors of today’s economy rely on STEM skills, so graduates have a plethora of career paths to choose from. In addition, compensation is high because companies face an acute shortage of qualified STEM workers.

Economics 101 tells us that the laws of supply and demand should fix this problem as high wages motivate more students to pursue computer and engineering degrees. Instead, exactly the opposite has occurred. We currently have fewer computer science graduates than we did

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The Culture Addict Dream Conference

Each year, the Motion Picture Association of America (MPAA) hosts a large conference at the Newseum dedicated to highlighting what is new in creativity, content, and technology around the world. At the most recent confab, held on Friday, April 24, MPAA’s message focused on how creativity and innovation will play an even more integral role in the future than they do today. Indeed, the Creativity Conference is about exploring the critical intersection between technology and the arts, and their capacity to drive invention and economic growth across industries and regions. Bringing together leaders from the worlds of politics, media, business, and the arts, the Creativity Conference engages its audience in an open dialogue on the meaning of creativity, its economic impact across sectors, and the ways in which we can continue to protect and nurture American innovation and innovators.

At the conference, a group of leading, innovative women discussed the ways in which Hollywood and Washington, D.C. intersect. Rep. Rosa DeLauro (D – CT), Evan Ryan (Assistant Secretary of State for Educational and Cultural Affairs), Barbara Hall (Creator and Executive Producer, Madam Secretary) and Lori McCreary (President, Producers Guild of

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50 Years of Moore’s Law

For 50 years, Moore’s Law has served as a guide for technologists everywhere in the world, setting the pace for the semiconductor industry’s innovation cycle. Moore’s Law has made a tremendous impact not only on the electronics industry, but on our world and our everyday life. It led us from the infancy of the PC era, through the formative years of the internet, to the adolescence of smartphones. Now, with the rise of the Internet of Things, market researchers forecast that in the next 5 years, the number of connected devices per person will more than double, so even after 50 years we don’t see Moore’s Law slowing down.

As chipmakers work tirelessly to continue device scaling, they are encountering daunting technical and economic hurdles. Increasing complexity is driving the need for new materials and new device architectures. Enabling these innovations and the node-over-node success of Moore’s Law requires advancements in precision materials engineering, including precision films, materials removal, materials modification and interface engineering, supported by metrology and inspection.

Though scaling is getting harder, I am confident Moore’s Law will continue because equipment suppliers and chipmakers never cease to innovate.

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Health Innovation More Valuable Than Previously Thought

Innovation is frequently underemphasized in the economics literature because it is qualitative by nature, and qualitative changes are hard to measure. A new NBER paper by three economists, Lakdawalla, Reif, and Malani, makes some progress toward a better measure of innovation, specifically innovation in health care. They show that by ignoring the way medical innovations help reduce risk, previous studies have tended to underestimate the true value of medical innovations—by as much as 30-80%.

To arrive at their estimates the authors use a new way of valuing risk. Our health is inherently risky, which is why we have health insurance for smoothing expenses out over time and between people. Innovation is also risky, which is why investors in startups often expect high returns and we often look to the government to fund basic research. But Lakdawalla, Reif, and Malani show that risks don’t always add up—sometimes they cancel out. Risks taken to innovate and create new health products and treatments can reduce health risks for people, because new innovations help keep us safer and healthier.

When risks taken in health innovation pay off, the reward they bring isn’t just the

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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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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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