CICP

A trade delegation led by Governor Daniels is scouring the Far East in search of new jobs and business opportunities this week, meeting with business and government leaders in China and Japan in hopes of adding to the historic influx of foreign investment Indiana has enjoyed over the last several years.   Today, the Hoosier State is home to more than 200 companies from Japan alone, employing as many – or more – workers than Detroit’s Big Three automakers here.

That’s the upside of the global economy: Manufacturing jobs, lured to Midwestern states like Indiana by the weak dollar, a ready workforce and proximity to the world’s biggest consumer market.  But we also have to be mindful of the threats posed by globalization, primary among them the erosion of the United States’ biggest competitive advantage, our capacity to innovate. 

It’s great that Indiana is attracting jobs based on our low business costs, the technical proficiencies of our workers and our geographic advantages.  But to create long-term prosperity in the high-tech economy, we also have to be a place where new technological advances and scientific breakthroughs are brought to life and commercialized. 

But as a nation, we’re falling behind in the race for innovation.

We aren’t encouraging innovation the way we should.  A new study by the Information Technology & Innovation Foundation shows that we now lag behind many industrialized and rapidly-developing countries in R&D tax incentives.  We were the first nation to reward innovation through the tax code, implementing the R&D credit in 1981.  But over the last decade, we’ve slipped to 17^th among OECD countries in R&D tax generosity, and developing nations like China, India, Singapore and Brazil are also employing more aggressive R&D strategies.  (China, for example, provides a 150% tax deduction on R&D expenses if companies increase investment by 10% or more over the previous year.)

Ultimately, though, tax credits don’t create innovation – people do.  But the U.S also lags in the human capital competition.  I’ve written previously about the massive investments China has made in higher education over the last decade, but a few numbers bear repeating:  More than 800 new colleges and universities built, the number of students in higher education more than tripled, and the number of graduates exploding from 8 million annually to more than 30 million.

Because of these trends, it’s widely recognized that there will be significantly more PhD engineers and scientists in China  than in the U.S. as early as next year.  A broader study by Rice University makes the startling projection that, again by 2010, 90% of all the world’s PhD-level engineers will live in Asia. 

We can’t surrender our numerical superiority in scientists, engineers, and other skilled workers without eventually seeing our innovation edge disappear.

And in fact, we’re already seeing the impact.  This thoughtful piece by TechPoint Chairman Mark Hill explores how the U.S. is slipping in our innovation-based economy relative to global competitors; for example, over the last decade, the $30 billion trade surplus that the U.S. used to enjoy in advanced technology products turned into a $53 billion deficit.

The overseas exploration that Governor Daniels and regional economic development groups like the Indy Partnership are engaged in is a critical part of succeeding in the global economy.  But it’s also essential to tend to our innovation infrastructure here at home – building an educated, creative workforce and incentivizing them to bring new ideas to market.