Why America is Losing Its Innovative Edge

As the world economy entered its worst decline since the Great Depression, corporations were less interested in  innovating.   Now, as the economy begins to recovers  U.S. corporations are in danger of being eclipsed by their Chinese rivals.

According to the World Intellectual Property Organization (WIPO), the total number of patent applications  filed across the world grew by 2.6% in 2007. This is the lowest growth rate since the dot-com bubble burst in the early 2000 .   To make matters worse, the data, the latest available,  showed zero growth in the U.S.   China, however, showed a gain of 18.2%.  Preliminary 2009 data showed a drop in filings at the major patent offices of 2.9%, WIPO says.  China, again, was the exception, showing a growth of 8.5% in applications.

Total trademark applications declined by 0.9% in 2008 – the first decrease since 2001. The drop in demand for trademarks is largely due to decreases in the number of applications from major countries.  American applications fell 11.7% while they soared by 20.8 percent in China.

“The post-crisis innovation landscape will invariably look different from that of a decade ago,”WIPO Director General Francis Gurry says . “While the strength of the recovery remains uncertain, there will likely be a continuing geographic shift of innovative activity toward new players, especially in Asia.”

The Research and Development spending picture also is depressing.  Expenditures by publicly available companies fell by 1.7 percent between 2008 and 2009. There were huge variations.  Companies in the troubled automotive, construction and consumer products sectors showed declines.  For example,  General Motors (NYSE:GM) dropped by 24.5% and Toyota Motor’s declined by 19.8%. Caterpillar Inc.’s (NYSE:CAT) dropped by 17.8%, and Unilever NV (LON: ULVR)  fell by 3.9%  China, however, continues to spend aggressively on R&D as R&D Magazine notes:

China’s investment in its Guangdong region, for example, is impressive: About 100 state laboratories for engineering innovation and R&D will be established over the next three years in this area and the goal is that by 2012 it will have three to five industrial clusters powered by high-technology that will generate nearly $15 billion in industrial output. By 2012, R&D expenditure will account for 2.5% of the region’s annual GDP.”

Indeed, China’s economic rise is breathtaking.  The Communist nation recently took Japan’s spot at the word’s second biggest economy.  Of course, the U.S. remains number one, but if its innovation economy dries up how long will that last.

WIPO’s data is cause for concern.  Innovation is the lifeblood of any economy.  Unless they create new products and services, businesses will eventually die.  This is particularly true of small businesses, which are the backbone of the U.S. economy.  They are also the major innovators. As the Kaufman Foundation notes,  startups create an average of 3 million new jobs annually.  Other types of companies are net job destroyers.

President Obama has recently proposed making the R&D tax credit permanent and even expanding it.  That idea — which is an ancient one — is long overdue.  We also need to streamline the patent process and make it more difficult for so-called patent trolls to enrich themselves through litigation.  The U.S. government also needs to give tax incentives for companies to (temporarily) hire workers to help generate sales which, in turn, will spur new ideas.

America will need decide — and decide soon — if it wants to be a nation of producers and consumers.   We all know that Americans are great consumers.  But if we want to control our destiny we have to make bold and innovative products and design.  Otherwise, instead of changing the world we will be changed by it.

–Jonathan Berr