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Manufacturing is still critical to the economy United States. Clyde Prestowitz, says it's time to start realizing the positive spillovers that manufacturing creates... Read more  

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Stephen Olson at Chinese Development Institute Conference

 

 Clyde Prestowitz giving presentation to CDI...

 

Steve Olson teaching trade negotiations at the Mekong Institute...

 

Stephen Olson to speak at upcoming workshop organized by the International Institute for Trade and Development on 

"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.

(11/19/09) Prestowitz Cited in Research Technology Management

Research Technology Management

November 2009 - December 2009

R&D: KEY TO THE 21st CENTURY

Norman R. Augustine


The ability to compete in our newly evolved world is closely tied to a nation's prowess in science and engineering. Scientists and engineers comprise only 4 percent of America's workforce but this small fraction vastly disproportionately creates jobs for the other 96 percent.

A number of studies have found that between 50 and 85 percent of the United States' growth in Gross Domestic Product during the past half-century can be attributed to scientific and engineering achievements. The Federal Reserve Board has concluded that nearly two-thirds of the increase in U.S. labor productivity in the last decade is attributable to the federal government's investment in research in science and engineering. These facts have not gone unnoticed by the leaders of other countries, such as China where eight of the top nine leaders are engineers. In contrast, more members of the U.S. House of Representatives (in a burst of candor!) list themselves as actors and entertainers than as engineers.

But let me begin at the beginning. My geologist friends tell me that something over 200 million years ago many of what today are the earth's major continents were joined in a single "supercontinent" known as Gondwanaland. It included, in part, what is now South America, Africa, Australia, Antartica, Arabia, and the Indian Peninsula. Over time, these land masses slowly drifted apart, with their influence on one another correspondingly diminishing.

Then, according to my economist friends, in just the last few decades, all those bodies came crashing back together again. As Tom Friedman put it in his remarkable book, The World is Flat, "Globalization has accidentally made Beijing, Bangalore and Bethesda next door neighbors." This truly is a remarkable happenstance- 200 million years of moving apart effectively reversed in just a few decades!

Today a single trader in Singapore can bring down one of England's most venerable banks; a problem with the economy in Southeast Asia produces a shock wave in the stock market in Europe; the "Shanghai Surprise" undermines the value of U.S. equities; the devaluation of the Russian ruble destroys the best known hedge fund in America; America's sub-prime credit crunch pushes Iceland into bankruptcy. And so it goes in this modern version of Gondwanaland, a world itself brought on largely by advances in science and engineering.

Death of Distance

Frances Cairncross, writing in The Economist, called this trend "The Death of Distance" to address the phenomenon of parties to many transactions no longer needing to be in close physical proximity to one another. Simply put, distance no longer matters.

Numerous real-world examples of the Death of Distance can already be found in our daily lives. For example:

* If a consumer places a telephone call to a customer service department to resolve a problem with their computer, bank account or even golf reservation, there is a non-trivial likelihood that he or she will speak with an individual in Bangalore, Jamaica, or some other such place. One international call center is now being operated by prisoners in Rome's Rebibbia prison (of course, we have a lot of business talent in U.S. prisons, too!). In India, to better prepare students for jobs in call centers, courses are being offered on how to speak with a midwestern accent. The workers are also told to choose a pseudonym that will make American callers more comfortable. My neighbor recently talked to a fellow in India who insisted his name was "Abraham Lincoln." Really! Not long ago I lost a suitcase when traveling between Washington, D.C. and Ithaca, New York, but to find it I had to speak with a fellow in Costa Rica. Reflecting this shrinking world, he actually advised me: "Never check your bag when you go through Philadelphia. In Philadelphia there are only two kinds of bags-carryon . . . and lost!"

* Visitors to one firm's offices not far from the White House are greeted by a pleasant woman whose image appears on a flat-screen display in the lobby of the building where she handles appointments, access, and other administrative matters. But she is in Pakistan, not Washington, D.C.

* The CAT scans of patients in a number of U.S. hospitals are routinely read by radiologists in Australia or India.

* And a patient in Strasbourg, France, had his gallbladder removed by a surgeon in New York using a remotely controlled robot. Several medical schools are now exploring the possibility of conducting the first two years of a doctor's training via distance learning.

In fact, candidates are now to be found around the globe for jobs traditionally located in developed countries-including America-and these candidates are just a mouse click away. As author Clyde Prestowitz, of the Economic Strategy Institute, pointed out, three billion would-be capitalists entered the global job market following the restructuring of many of the world's political systems that occurred late in the last century.

And far fewer jobs are "safe" than many might think. Most citizens in the developed countries paid little attention when the job losses were confined to assembly workers. But the trend soon migrated to writing software, back-office administrative work and, more recently, to such professional pursuits as medicine, engineering, accounting, banking, and architecture.

Can Americans Compete?

It is, of course, good that more people on this earth will be prospering: it should make war less likely, it will provide a more humane global society, and it will strengthen the world economy as a whole. The question that is drawing significantly greater attention both on Pennsylvania Avenue as well as on Main Street is, "Can Americans compete for jobs in this new world order-or are we simply going to fall off the edge of the Flat Earth?" The question might, I suppose, be asked of the citizenry of any developed country.

That was the question a bipartisan group from the House of Representatives and Senate asked the National Academies of Science, Engineering and Medicine, organizations that currently include 195 Nobel laureates in their membership. The Academies formed a committee in 2005, composed of CEOs, university presidents, public school administrators, former presidential appointees, and Nobel laureates to address the question. (Two of our members are now serving in President Obama's cabinet- one as Secretary of Defense and one as Secretary of Energy.)

As we pursued our work we were repeatedly reminded that national leadership is not a birthright. Recall that Spain was a leading power in the 16th Century; France dominated the 17th; Britain the 19th; and America the 20th. Warren Buffett is quoted as having said that the 21st century will belong to China. If history teaches us any lesson it is that no nation has an innate right to greatness. Nations that take their technological leadership for granted are particularly vulnerable in this fastforward world.

Typifying this latter tendency is a story told to me by Dan Goldin when he was Administrator of NASA. Dan was being excoriated by a critic of NASA who objected to the amount of money being spent on earth satellites. The skeptic had asked, "Why do we need meteorological satellites? . . . we have the Weather Channel."

The impact the Flat Earth is having on the world economy is profound and has only begun to be felt. A few of the many indicators of galloping globalization as it affects the United States include:

* Nearly 60 percent of the patents filed with the United States Patent Office in the exploding field of information technology now originate in Asia.

* Two-thirds of the Ph.D.s granted by U.S. engineering schools now go to non-U.S. citizens.

* Seventy-seven percent of the new R&D facilities planned for construction in the next three years by companies from around the world are scheduled to be built in either China or India.

* There are now 12 energy companies outside the U.S. whose reserves exceed those of ExxonMobil.

* In Business Week's ranking of the world's informationtechnology companies, only one of the top 10 is based in the United States.

* Eight of the world's ten wealthiest individuals are not Americans.

* And the remnants of the legendary Bell Labs, birthplace of the laser and the transistor, have been merged into a French firm.

Ability To Innovate

So how are we going to compete in a world where others are willing to work, and work hard, for a fraction of the wages upon which our standard of living is built? The answer of the National Academies committee-along with many others-is that our competitive edge will have to be our ability to innovate. That is, it will depend upon our ability to discover new knowledge through cutting-edge scientific research; to transform that knowledge into new products and services through engineering prowess; and to be first-to-market through extraor dinary entrepreneurship.

A prime driver in this new knowledge economy will thus be the education of the populace-and especially of a cadre of individuals who can propel innovation, particularly in science and engineering.

In this regard, Alan Greenspan has said, "If you don't solve [the kindergarten through 12th grade education problem], nothing else is going to matter all that much."

America has some outstanding schools, some outstanding teachers and some outstanding students-but overall, at least by global standards, we are failing, and failing abysmally. On international tests in math and science, U.S. students invariably rank near the bottom of the global class. Our fourth-graders do respectably on international tests, but by the time they are in high school they are nearly in last place; that is, the longer they are exposed to our schools, the worse they do. This is a clear case of you don't get what you pay for, since our per-student expenditures are nearly the highest in the world.

How could all this be? Well, for openers, in America's schools 69 percent of 5th-8th-grade students are taught math by teachers who posses neither a degree nor a certificate in math. Fully 93 percent of students are taught physical sciences by teachers with neither a degree nor a certificate in the physical sciences. In fact, over half of the nation's science teachers have not had a single college course in the field they teach.

At the University of North Carolina, President Erskine Bowles, in his inaugural address, remarked, "Think about this: in the past four years, our 15 schools of education at the University of North Carolina turned out a grand total of three physics teachers. Three." And be assured that North Carolina is not alone in this regard.

Forty-six percent of the nation's teachers abandon the classroom within five years in order to pursue other careers.

But teachers are not the only ones who drop out; so do one-third of our high school students-one every 20 seconds-along with half of our college students.

Bill Gates has remarked that "When I compare our high schools to what I see when I'm traveling abroad, I'm terrified for our workforce of tomorrow."

Citizen-Scientists and Engineers

Turning to the supply of scientists and engineers, one finds that the production of citizen-scientists and engineers is, not surprisingly, proving particularly challenging:

* During the past two decades, part of an era that has been described as technology's greatest period of accomplishment, the number of engineers, mathematicians and physical scientists graduating in the U.S. with bachelor's degrees actually declined by over 20 percent until a recent up-tick, propelled mostly by an increase in foreign students. This contrasts with a growth in the production of lawyers of 20 percent and M.B.A.s of 120 percent during the same period.

* The number of engineering doctorates awarded by U.S. universities to U.S. citizens dropped 34 percent in the past decade.

* Of the three undergraduate universities whose grad uates receive the most Ph.D.s from U.S. universities in science or engineering, two are in China and one is in Korea.

* The U.S. now ranks 60th among all nations, and 17th among developed nations, in the fraction of college graduates who receive their degrees in science or engineering.

* The late Nobel laureate, Richard Smalley, predicted that by 2010 90 percent of all scientists and engineers in the world with Ph.D.s will be living in Asia.

* And think about this: China is already graduating more English-speaking engineers than we are in the United States.

Ironically, The Washington Post, in a recent article on how to get good grades in college, advised, "Don't study engineering."

Speaking to a group of the nation's political leaders in our nation's capital, Jeff Immelt, CEO of General Electric, observed: "We had more sports-exercise majors graduate than electrical engineering graduates last year. If you want to become the massage capital of the world, you're well on your way."

And if that is too subtle, listen to the words of Craig Barrett, Intel's chairman (now retired), in a Business Week blog: "we as a country have chosen not to compete. . .we've killed investment banking and now we are killing engineering . . . it's our future and we are throwing it down the drain."

In most developing countries, careers in science and engineering are highly regarded by young people. George Heilmeier, the former Director of the Defense Advanced Research Projects Agency e-mailed me while on a recent trip saying that when he is in Russia he likes to go to the movies, and he went on to explain that, "In Russia, the engineer always gets the girl."

In that regard, women receive only 20 percent of the engineering bachelor's degrees in the U.S. and 17 percent of the engineering doctorates awarded by U.S. universities. Members of minority groups receive even lesser proportionate shares of science and engineering degrees. For example, African-Americans and Hispanics, each making up about 12 percent of the total U.S. population, each receive fewer than 5 percent of the bachelors and doctorates awarded in these fields. Recently there were some encouraging signs of an up-turn-however, it is far too early to begin celebrating.

The truth is that America's science and engineering enterprise would scarcely function without its foreign-born contributors. During the most recent 15-year period, over one-fourth of our scientists who received Nobel Prizes were foreign-born. Fifty-two percent of the Ph.D.s in the U.S. science and engineering workforce under 45 years of age-considered by many to be the most productive years-are foreign born. Recently, these talented individuals began discovering that there are opportunities elsewhere, and our own immigration policies seem designed to chase them out of America. Yahoo co-founder, Jerry Yang, reminds us that, "Yahoo would not be an American company today if the United States had not welcomed my family and me almost 30 years ago."

The global balance of power in science and engineering can, of course, tip very rapidly. Craig Barrett, the retired chairman of Intel and a member of the National Academies committee, pointed out that 90 percent of the firm's revenues on December 31 are derived from products that did not even exist on January 1 of that same year.

And that brings us to basic research, the engine that drives competitiveness in this modern age. Government funding of research in the physical sciences, mathematics and engineering has flat-lined in real terms for a quarter-century. After a significant increase in the health sciences several years ago, these fields, along with the other biosciences, have suffered from the corrosive effects of inflation or, in some cases, outright reductions.

Turning to industrial research, many corporations are abandoning the playing field. Eighty percent of the CFO's responding to a recent survey said they would cut R&D in order to meet the profit projections they have given "the street."

Debacle on Wall Street

Why would any firm take such an irrational step? Consider the following incident that occurred a few years ago at the company where I was employed. Motivated by an unusually large stable of highly promising research opportunities, the company's management conducted a briefing for Wall Street analysts to inform them of a planned increase in investment in research and the promise this would offer for the company's future growth and profitability. At the end of the briefing by the company's president, most members of the audience literally ran from the room and sold our firm's stock. The company's share price dropped by 11 percent during the next few days, about what it typically took 180,000 of us working for a year to add.

Shortly after the "Debacle on Wall Street," as the event became known in the company's research laboratories and executive suite, I asked one of the attendees at the briefing what had been said that was wrong. The analyst responded impatiently, "You should know that it takes 10 or 15 years for research to pay off, if it does at all. Your average shareholder owns your stock for about 18 months, doesn't care what happens to you 10 or 15 years from now, and certainly doesn't want to pay for it. In fact, by that time the investor will probably own one of your competitors' shares and would be just as happy if your firm were not competitive." The analyst then administered the coup de grâce, explaining, "Our firm does not invest in companies with such short-sighted management."

A further concern is that our nation's research efforts are becoming increasingly risk-averse-that we are unwilling to engage in the long-range, frequently high-risk fundamental research that in the past has led to so many advancements and created so many jobs. The wisest engineers and entrepreneurs could not produce iPods, GPS, computers and Blackberries were it not for the research in quantum mechanics that was performed decades ago.

Yet another factor-albeit of gradually declining importance as the earth flattens-that impacts decisions by firms as to where their facilities and accompanying jobs should be located is the availability of potential customers. It is estimated that by 2020, 80 percent of the world's middle-class will live in what are now categorized as "developing" nations. As soon as 2012, China is expected to have nearly twice as many middle-income consumers as the entire population of the U.S. at that time.

Margaret Thatcher eloquently summarized the significance, as well as complexities, of basic research in her 1989 remarks on the overall topic of innovation:

Although basic science can have colossal economic rewards, they are totally unpredictable. And therefore the rewards cannot be judged by immediate results. Nevertheless, the value of Faraday's work today must be higher then the capitalization of all shares on the stock exchange. . . . The greatest economic benefits of scientific research have always resulted from advances in fundamental knowledge rather than the search for specific applications. . . . Transistors were not discovered by the entertainment industry . . . but by people working on wave mechanics and solid state physics. [Nuclear energy] was not discovered by oil companies with large budgets seeking alternative forms of energy, but by scientists like Einstein and Rutherford.

Innovation Ecosystem

Another factor that determines a nation's competitiveness is what has been called the innovation ecosystem, which includes a combination of factors that relate to the "innovation friendliness" of a nation. One such factor is the availability of investment capital. Six years ago only 8 percent of the money newly invested in U.S. stock funds went overseas-not long ago, before the economy imploded, the fraction reached 77 percent. Compounding this, American firms now spend three times as much on litigation as on research. General Motors is said to have spent more on health care than on steel, Starbucks more on health care than coffee.

It is tempting, especially to people such as myself who are disciples of Adam Smith, to say, "Let market forces solve the competitiveness and standard of living problems." But that, from the perspective of developed countries, including America, is the problem. Market forces are solving the problem. Companies are solving the problem simply by creating jobs outside the United States.

A comment by Intel's Howard High is fairly representative: "We go where the smart people are. Now our business operations are two-thirds in the U.S. and one-third overseas. But that ratio will flip over in the next 10 years." One hundred and twenty-five of America's Fortune 500 companies have already established research facilities in India alone-and others are poised to add to this total.

The U.S. National Academies 2005 report on competitiveness, which became known as the "Gathering Storm" report after the first line in its title, laid out a plan of 20 specific actions to help keep the United States competitive. These include programs to produce 10,000 more fully qualified math and science teachers each year and to double the nation's investment in basic research.

What Now for America?

I suppose one could say during the first two years after our report was released much was accomplished. For example, a new research university was launched with an opening day endowment of $10 billion, equal to what it took MIT 142 years to accumulate. Over 200,000 students studied abroad, mostly in the fields of science and engineering, often under government-provided scholarships. Government investment in non-defense R&D increased by 25 percent. A multi-year initiative was established to make the country a global nanotechnology hub. The world's most powerful particle accelerator began operation. The President ordered that $3 billion be added to the science budget. And a high-level commission conducted a follow-up to the Gathering Storm study with the specific objective of creating jobs at home.

However, these steps were taken not by the United States but, rather, by Saudi Arabia, China, the U.K., India, Switzerland, Russia and Australia, respectively. What about the United States? President Bush strongly supported the key elements of the National Academies plan in his State of the Union message shortly after our committee completed its work. The essence of the plan was authorized by an 88 to 8 vote in the Senate and 397 to 20 in the House of Representatives-this an election year. Nevertheless, due to an avalanche of 9,800 earmarks- earmarks exacerbated by what can perhaps best be characterized as a system failure-the omnibus budget act that actually provides the funds to implement programs, failed to address America's competitiveness in any meaningful way. In keeping with my book Augustine's Laws, the government's budget process turned out to be the epoxy that greased the wheels of progress.

Then a strange thing happened "on the way to the Forum": the economy collapsed, jobs disappeared at a rate of 20,000 per day, 6,000 bankruptcies were filed each day, tax revenues dropped, and the government began spending huge sums. Fortunately, under President Obama's leadership some of these sums are being devoted to the very things the Gathering Storm committee recommended. They fortunately were "shovel-ready" by virtue of their having already been authorized by the President, the House and the Senate. As a result, a major increase in funding of research and research equipment is now underway. The challenge will be to sustain that increase for 15 or 20 years or more.

Winston Churchill once said that you can always count on the Americans to do right thing . . . after they have tried everything else. This is a case where we need to get it right this time.

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