A Connecticut Yankee In The Global Economy
Not every innovation needs to be a home run or a breakthrough that transforms an industry.
January 1 1989 by Charles R. Lamantia
Americans believe in technology. Like Mark Twain’s Connecticut Yankee, who declared that he “could make anything a body wants-anything in the world…and if there wasn’t a quick, new-fangled way to make a thing, he could invent one-and do it just as easy as falling off a log,” Americans trust in the power of Yankee ingenuity.
No doubt if I were writing this in 1958 instead of 1988, I would sound a lot like the Connecticut Yankee myself, talking optimistically about progress and praising Yankee know-how. For in that Golden Age of American industry, when we were stamping “Made in The USA” on most of the cars, steel, and electronic equipment made in the world, opportunities for leadership seemed limitless.
Today things are different. We have moved away from a time when American ideas, technology, and institutions were the world standards to a time when we have lost our competitive edge. The Japanese, the Koreans, and the Europeans build the cars, the electronic equipment, and many of the other products that Americans and the rest of the world buy. The United States, staggering under the weight of massive debt and an unprecedented trade deficit, is hard pressed to keep up.
Far fewer of our best and brightest are becoming inventors, engineers, and educators. Instead, armies of lawyers and investment bankers drive German cars into decaying American cities to sell real estate to the Japanese. Many critics of American industry and American society believe we need only revive our lagging technology to become fully competitive again. But the forces that have damaged our competitiveness are pervasive and fundamental, affecting technology, as well as other aspects, of American life.
Yankee ingenuity can only reach its full potential if other traditional Yankee values such as thrift, frugality, and hard work are applied to our political life, our corporate enterprises, and our individual efforts.
Two categories of forces hurt our competitiveness and restrain our technological prowess: broad sociopolitical forces and economic trends; and corporate or industry issues. The results of these forces are the rapid growth of consumer spending and debt at the expense of investment; corporate choices that favor the next quarter’s earnings over R&D that will benefit the company in the long haul; and decisions to license out technology rather than develop it into exportable products-to sell the cow rather than the milk.
The 1987 budget deficit was $150 billion. Our cumulative federal debt now exceeds $2 trillion. The budget choices we make as a society-such as spending large sums of money on defense, social security, and Medicare-tend to hurt our competitiveness, even if we agree with them. The 1980s have witnessed a sharp decline in the percent of our gross national product plowed back into the economy in the form of private domestic investment. Our personal savings rate is 3 percent of disposable income, far below the 7 percent level of a decade ago and minuscule next to West Germany’s 12 percent and Japan’s 16 percent rate, which give those countries ample access to capital. Our indebtedness as individuals, taken together, roughly equals the federal debt.
This growing indebtedness is troubling evidence of a broad cultural shift. Our society has switched its emphasis from long-range goals and deferred satisfaction to short-term payout against long-term investment. But other industrialized nations face the same rate of technological change. Why are they better at coping with it?
Much of the answer lies with our difficulties in converting research gains into competitive products. While the Japanese seem to have mastered the process, we lag behind. The average new U.S. car design, for instance, takes one and a half years longer to reach product than the average, new Japanese design.
Because American firms are not quick to create globally marketable products even when they have excellent ideas, America has become the world’s greatest exporter of intellectual property. Apple Computer’s chairman John Sculley notes that U.S. and Japanese companies made about 32,000 technology licensing agreements from 1952 to 1980. These deals earned U.S. licensors about $9 billion but cost the U.S. economy over $500 billion in production and sales.
Although the U.S. leads the world in R&D spending, we devote a higher proportion of that spending to defense than Europe or Japan. That investment has only a partial spillover into industrial products. Growth in business-sponsored R&D spending in the U.S. and the European Economic Community is one half that of Japan’s. We also devote a higher percentage of our industrial R&D to high-tech areas. This means we are less likely to make incremental gains in the low-technology areas that make up much of the world’s economic base.
America nevertheless still produces more innovation than any other country and has the best system of advanced technical education in the world. But as we have done less to turn new technology into products, our ability to innovate has begun to decline. When a technological advance made in an R&D laboratory in Ohio is turned into a product at a Taiwanese factory, the lab loses something. Most importantly, it loses knowledge about design and about manufacturing-knowledge that must be put back into the development process if our innovations are to continue to be useful.
Another sign of our decline is the fact that nearly half of U.S. patents issued in 1987 went to foreign applicants. Japanese applicants alone won nearly 20 percent of all U.S. patents last year. And a recent analysis for the National Science Foundation showed that Japan was far ahead of the U.S. in patent quality.
THE DECLINE IN INNOVATION
Say the word “innovation” to most U.S. managers and what they think of is the big breakthrough-the transistor, the semiconductor chip, the polio vaccine-rather than the small, incremental improvement. As the MIT Commission on Industrial Productivity put it, U.S. companies have a “tendency to overinnovate on product and underinnovate on process.” Yet, taken together, minor improvements in processes have a greater impact on productivity and competitiveness than the big breakthroughs. Industries that are oriented to processes rather than products have a fine record of innovation and productivity improvement. For example, the chemical industry in the U.S. has recently delivered trade surpluses in an era of huge deficits. One reason may be that chemical engineers have always had to integrate design with manufacturing. In contrast, the discrete manufacturing industries tend to separate the two functions-often with harmful results.
Although America’s productivity is still the highest in the world, it has been growing at less than one-fourth the rate achieved by Japan and the Common Market nations over the past decade. Part of the reason for this relatively slow growth in productivity has been diminished long-term investment. In many businesses, R&D is stifled bacause of an emphasis on the quick payback. For example, after the initial excitement over the discovery of superconductivity at higher temperatures wore off, industry realized that making commercial use of the breakthroughs would require long-term investments and commitments. The application problems are difficult, and marketable products may be up to a decade away. As a result, the U.S. industry’s interest in the subject has apparently waned. But the Japanese have not been deterred. Already they have filed for over 2,000 superconductivity patents worldwide and have announced product applications. Will superconductivity be another instance in which U.S. scientists share in the glory of a major discovery while U.S. industry loses out in the marketplace?
The changed nature of corporate ownership and management in America reinforces the emphasis on the short term. When Wall Street and investors constantly scrutinize the next quarter’s earnings, when the threat of acquisition or restructuring hangs heavy at each board meeting, who is driving corporate investments? Many managers don’t have the breathing room to execute long-term strategies because the owners of the company are committed to it only as long as the share price keeps climbing. One result of this short-term corporate focus is an increased reliance on outside entrepreneurs to deliver the technological breakthroughs we need for economic growth. This is occurring in the superconductivity field, where most of the U.S. commercialization seems to be taking place in start-up companies. But this model doesn’t work well in sectors of the economy which require huge amounts of capital for innovation, such as the aerospace business, or in low-growth basic industries, which attract few entrepreneurs.
Our challenge is to unlock our technological advantages by making ourselves more competitive in the global economy. We must maintain and strengthen our system of technical education. In government, we must recognize that competition in most businesses takes place on a global scale and that corporate cooperation in high-tech areas is not only harmless but essential. In industry, we must excel at turning innovation into products. And as individuals, we must look beyond the next year to the next decade.
The first priority for government must be fiscal responsibility. Our national debt is becoming insupportable, but we have options. We could raise taxes, encourage savings through tax laws, limit our entitlement programs to those who truly need them, and cut back on military spending by becoming more efficient in procurement and getting our allies to spend greater shares of their GNPs on defense. Beyond these fiscal matters, the government could address the competitiveness problem by working to improve patent protection outside the United States. We should unfetter U.S. companies by allowing greater cooperation in R&D where there is enough external competition. We must also find a way to foster innovation in industries-such as aerospace-that cannot rely on the entrepreneur to bring in new technology.
An equally daunting list of changes must be made at the company and industry level. To be competitive, our manufacturing productivity and product quality must meet ever-higher world standards. We must concentrate on making the small innovations in processes that yield incremental improvements in productivity. Not every innovation needs to be a home run or a breakthrough that transforms an industry. Our manufacturing operations and our work force need to become more flexible, so that we can react quickly to changes in technology. We must get better at embodying technology in products and processes. Licensing out valuable innovations simply because we are too slow to adapt them ourselves is a form of economic suicide.
To develop products that achieve market leadership, companies must understand the competitive environment those products will enter. They must know the manufacturing processes and technologies that will be used in production. In the early stages of innovation, the most fruitful research responds to market needs, not technological advances. This kind of R&D is best carried out, not in isolation but, in the midst of many other business functions. I believe that some of the greatest commercial innovations of the next decade will be turned out by cross-functional teams that fit technology into a framework with marketing and manufacturing. Shortening product development times also depends on cross-pollination and teamwork. In pursuit of shorter product cycles, today’s leaner corporations are farming out work, contracting with product development specialists, shifting responsibility for design and quality to suppliers, and gaining flexibility from temporary workers.
We must also rethink the ways in which we judge managers’ skills. In Europe and Japan, two-thirds of the top managers have technical degrees, compared to only one-third in the U.S.. The governments of Japan and many European countries encourage research scientists and engineers to take an active part in policy planning. In the United States, on the other hand, government is largely the province of lawyers, and most chief executives are far more familiar with financial markets than with the shop floor or the assembly line. Despite our strong research base, we have an underengineered society, particularly when it comes to the production line. And we provide a few incentives for those who choose such careers. Only 5 percent of a group of Fortune 500 executives named production when asked to choose which specialty was most likely to lead to success in American industry. Over 60 percent chose marketing or finance.
The technical education in our high schools and vocational schools is inferior to that provided in many other countries. An increasing proportion of our high school graduates are mathematically and scientifically illiterate. This is a serious problem in a world where more and more industrial processes require technical skills of every worker. Because technical training is not highly valued in America, many of our best engineering schools fill their classes with foreign students. In 1986, 42 percent of graduate engineering students in the U.S. were non-U.S. citizens. Many of these students return to their native lands to put their knowledge to work for competitors of U.S firms. Like intellectual property, graduate technical education is not a product the United States can afford to export if it is to compete in the global economy.
Science in an ivory tower can win Nobel Prizes and produce stunning breakthroughs. But without engineering talent, a skilled workforce, and management that applies technology, our discoveries will benefit other countries more than ourselves. Technology cannot solve our competitiveness problems, but people with technical skills and creative energy can. We must ensure that excellence in technical training begins early and continues throughout our educational system. We must reemphasize those engineering and management skills that allow us to improve productivity, and bring those who possess such skills into the decision-making process.
In 1988, we may consider ourselves too sophisticated for the Connecticut Yankee. Like Twain, we may be pessimistic about his power to improve civilization. I believe his inventiveness, his adaptability, and his hands-on skills make him a superior model for success in the global economy.
Charles R. LaMantia is president and chief executive of Arthur D. Little, Inc. He was president of Koch Process Systems, Inc., an integrated engineering and manufacturing firm, served as a technical and economic consultant in the chemical process, energy, and pollution control industries, and is an inventor who shares three U.S. patents.