Monday, February 18, 2013

Technology-based Growth Strategy

By Keith McDowell

Global competition, economic malaise, loss of manufacturing jobs, high unemployment, and a host of other bad news! Where does it all end and how did we get into this mess? Is innovation coupled to entrepreneurship the sure-fire answer? While a tepid yes is the appropriate reply, that’s not the whole answer.

As we have described in our ebook Go Forth And Innovate! and in over eighty opinion pieces, America is slowly but surely losing the global competition battle principally for two reasons. First, we have failed as a nation to come to grips with a full understanding of the complexity of a modern emergent innovation ecosystem including the process of commercialization and, second, we have failed at the national level to either create or implement rational policies based on such an understanding. Furthermore, those failures have become inextricably tied to the political gridlock facing our nation and the dysfunctional behavior of Congress.

Like many, I believe that it is absolutely essential that Americans of all brands, flavors, and beliefs come together in common cause to debate and frame the discussion in order to ensure that reason and fact prevail. And in that regard, a recent paper by Gregory Tassey entitled “Beyond the business cycle: The need for a technology-based growth strategy” is a must read and comports to and with everything that I have come to appreciate and understand about the emergent global innovation ecosystem.

The abstract to the journal paper perhaps best encapsulates its message.

This paper assesses the limitations of monetary and fiscal policies for establishing long-term growth trajectories and instead proposes a technology-based economic strategy targeted at long-term growth in productivity. The model expands the original Schumpeterian concept of technology as the long-term driver of economic growth where technology is characterized as a homogeneous entity developed and commercialized solely by industry. Instead, the new model defines technology as a multi-element asset that evolves over several phases of the R&D cycle, is developed by public-private investment strategy, and is commercialized by a complex industry structure of both large and small firms. Eventually, the policy choice is between traditional macrostabilization policies that increase aggregate demand but do not significantly increased the real incomes of workers, resulting ultimately in inflation; or a technology-driven investment strategy that increases the productivity of the economy, thereby increasing the capacity of an economy to grow without inflation.

Throughout the paper, Tassey focuses on expanding the current narrow model based on increasing “allocative efficiencies” through spending to stimulate demand while using macroeconomic control mechanisms (example, “shovel-ready” projects), to one of increasing “productive efficiencies” with a greater emphasis on microeconomic growth policy. Some attention is also paid to an even higher-order of “adaptive efficiencies,” a theme that I strongly endorse.

Tassey argues that America must invest in five categories of productivity-enhancing assets:
·      Technology (intellectual capital)
·      Skilled labor (human capital)
·      Hardware and software (non-human capital)
·      Industry structure and behavior (organizational/marketing capital)
·      Technical infrastructure (public capital)

The emergent complexity of the modern innovation ecosystem is recognized by Tassey and is displayed in the image at the beginning of this article as copied from his paper. From Tassey’s perspective, “long-term productivity growth requires increasing the technological content of products, processes, and services” and that “Achieving this goal requires coordinated advances in science, technology, innovation, and diffusion (STID) assets.” I could not agree more!

And at the core of this commercialization process, we must have an R&D policy “based on three critical drivers: the amount of R&D, the composition of R&D, and the efficiency by which the first two drivers are managed.” Increasing R&D as a percentage of GDP goes without saying and its relative decline in the United States is documented by Tassey.

The composition of federally funded R&D “has historically been focused on specific mandated missions (national defense, health, space exploration, etc.) rather than on economic growth as a first-order objective.” Unfortunately, such mission-driven R&D carries with it a slow commercialization time line that is mostly out-of-synch with the continuing compression of technology life cycles. Tassey doesn’t clearly indicate detailed solution or policy pathways to resolve these and related issues, but that discussion has been an ongoing one by this author and many others.

The efficiency of how we manage the first two drivers is described by Tassey in the form of “new public-private research infrastructures in the form of regional technology-based clusters.” Such regional innovation clusters as part of a vibrant multi-layered, hierarchical, but adaptive network have long been my personal view of what should and must constitute a modern innovation ecosystem.

In the final analysis, I agree with Tassey that “Government, with a lower discount rate, the ability to undertake riskier projects, and the resources to support a broad portfolio of long-term R&D must be a major supporter of the elements of complex modern technologies with public good content.” But having said that, I see no concerted effort being made in Washington or nationally to bring together capable people to develop or to achieve such a plan other than by those of us dedicated to the cause – the advances of the Obama Administration notwithstanding.

And therein lies our ultimate problem as a nation. No matter how well Tassey and others formulate or frame the issues, and no matter how energetically we debate and discuss these issues, without action, there is no progress. 

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