THE INNOVATION ECONOMY -- THE PROMISE OF INNOVATION
This Way To The Future
From energy to biotech, we may be on the cusp of a new age of innovation.
Seventy-five years is a mere blink of history's eye. Yet since 1929, when BusinessWeek
was first published, the world has been transformed by profound innovation and
technological wizardry. Three-quarters of a century ago, there were no safe and effective
antibiotics, no jet travel, no commercial television, and no computers. Many died of
routine infections. A five-day ocean voyage was the main way to get from America to
Europe, and "wireless" meant the wood-paneled Radiola in the parlor. Since then our
mastery of the physical and biological world has strengthened remarkably. Life
expectancy has soared, and most citizens of the planet can look forward to being around
for 65 years or more. The Green Revolution has transformed agriculture, and the earth
can now feed a global population that has tripled since 1929. We've left dusty bootprints
on the moon, created the Internet, and learned how to read the human genome.
Thanks to these advances -- and a string of others -- workers are able to produce far
more than they did in 1929. Output per hour in the U.S. has risen almost fivefold over the
past 75 years, translating into an average climb of 2% a year in productivity. Many other
industrialized countries have seen comparable gains, while developing countries have
been able to take advantage of fast air travel and a near-instantaneous web of
communication to become truly part of the global economy in a way that would not have
been possible in the past.
But as we consider the state of the Innovation Economy, it's clear that the march of
technological progress has been uneven. In recent years, change has been far more
rapid in information processing and health care than in energy, transportation, and
manufacturing. In many industries we still depend on older technologies that date back
to the 19th and early 20th centuries. The internal combustion engine was invented in
Germany in the 1860s, Thomas Edison's first commercial electric power station opened
in 1882, and today's process for turning bauxite into aluminum was first demonstrated in
1886. To someone from 1929, today's cars and gasoline pumps would seem familiar in
function, if different in details, while today's computers would be completely mysterious.
THE STAGE IS SET
So a fair question to ask is this: Should we expect the next 75 years to bring the same
sort of exciting and radical innovation that has transformed information technology and
health care? Or will the progress be slower and more incremental -- an elaboration of
existing technologies and industries rather than the birthing of new ones? In short, where
is the Innovation Economy heading?
Making predictions about technological change is always perilous. But, as we hope to
show in this Special Report, the global economy could be on the cusp of an age of
innovation equal to that of the past 75 years. All the right factors are in place: Science is
advancing rapidly, more countries are willing to devote resources to research and
development and education, and corporate managers, too, are convinced of the
importance of embracing change.
Across the range of fields, from energy to biotech, and from software to autos, there are
innovations brewing that could revolutionize our lives. In recent years scientists in
different disciplines have been laying the foundations for nanotech, preparing the way for
feats of engineering at the scale of atoms and molecules. Such small wonders could
eventually lead to vastly faster computing devices based on carbon nanotubes,
miniature medical probes, and new types of lights and solar cells.
There are signs, too, that energy technology is about to make a dramatic leap forward,
with the promise of efficient fuel cells, new approaches to solar power, and safer nuclear
plants. Such advances have the potential, in the not-too-distant future, to overturn the
economics of energy, making the world less dependent on oil and other fossil fuels.
And in the biological sciences, the current limits on health and mortality may turn out to
be a boundary waiting to be traversed. "We are finding out how life works in such
fundamental ways," says Susan L. Lindquist, director of the Whitehead Institute at
Massachusetts Institute of Technology. "If we can leverage that to understand why
things go wrong, it will have an amazing impact." Adds Kevin W. Sharer, CEO of biotech
giant Amgen Inc. (AMGN ): "I liken today to 1946, when the potential for computers and
electronics was just emerging."
Not coincidentally, this new wave of technologies is gathering force just as innovation
has gone global. In the industrial countries, non-defense private and government
spending on R&D has risen from 1.6% of gross domestic product in 1981 to 2.1% in
2002, the last year for which data are available. Published scientific research has
increased by 40% since 1988, with the gains spread around the world. And many
countries in Europe and Asia are following the U.S. lead and devoting more money to
higher education, which produces a key input for innovation -- educated workers.
What's more, the leading engine for innovation -- the U.S. -- is still going strong. True,
there's justifiable concern among top scientists and corporate leaders that the U.S. could
eventually fall behind its global rivals -- a "quiet crisis," in the words of Shirley Ann
Jackson, head of Rensselaer Polytechnic Institute and president of the American
Association for the Advancement of Science. But at least for now, "we still truly have the
best graduate programs in science and engineering," says Jackson. "And we have the
kind of economic system and capital markets that support the exploitation of
The rate and path of innovation will be critical for determining the world's economic
future. Indeed, having an innovative society may be more important for growth than
having a high rate of capital investment. Since 1995 the share of national output going to
business investment in the U.S. has averaged only 11.3%, almost identical to the
previous two decades, and considerably lower than Japan. Yet U.S. productivity has
surged because of the rapid adoption of new technology, in the form of the personal
computer and the Internet.
Without technological breakthroughs, it will be difficult to solve the most pressing long-
term problems. It's hard to see, for example, how the fast-growing energy needs of
emerging economies such as China and India can be met over the long term without
new sources of energy. And providing affordable health care to aging populations
around the world will be a challenge unless medical productivity dramatically improves --
and that won't happen until health-care technology advances far enough to reduce costs
rather than increase them.
Nor will it be possible to generate enough good jobs for American workers in the future
without new innovative industries. The events of the 1990s reminded us how a
technological breakthrough -- the Internet -- could inspire an employment boom and
create whole new categories of occupations, just as innovations such as the automobile
and railroads have in the past. More than ever, it's clear that America's prosperity
depends on its ability to remain the global innovation leader.
Innovations don't have to be technological breakthroughs, like the Internet. They can be
more mundane advances in, for example, manufacturing or retailing or the
reorganization of work processes within a corporation. The idea of "lean manufacturing,"
introduced by Toyota Motor Corp. (TM ) in the 1960s and '70s, showed how it was
possible to increase the quality and reduce the cost of assembly-line production. Around
the same time, the advent of "big box" retailers such as Wal-Mart Stores Inc. (WMT ),
which opened its first store in 1962, brought highly efficient logistics and tightly
integrated supply chains to retailing. This innovation -- based in part on effective use of
information technology -- is a key reason why retail productivity has risen so much faster
in the U.S. than in Europe. More recently, eBay's (EBAY ) ability to successfully run
auctions online has opened up a sales channel that never existed before.
In addition, the rapid pace of financial innovation -- mostly in the U.S. -- has made capital
markets far more liquid and stable, translating into more innovation and growth. The first
real venture-capital firm, American Research & Development, came into being in 1946,
making it much easier to finance innovative startups. The invention of the credit card,
introduced by Bank of America Corp. (BAC ) in 1958, gave middle-class Americans
access to easy and immediate credit. And the creation of the mortgage-backed
securities markets in the 1970s transformed the way that housing was financed, and
enabled homeowners to tap into their home equity.
But there are no guarantees, either for the global economy or for the U.S. It may take
years or decades before scientific breakthroughs are translated into marketable
technologies and products, and equally long before businesses can figure out how to
make the best use of them.
The whole process of innovation is far more delicate and fragile than most people
realize. It requires a climate that funds basic research and encourages risk-taking yet
has the market discipline necessary to identify the best products and bring them to
market. "There's nothing preordained about innovation," says Joel Mokyr, president of
the Economic History Assn. and a specialist in the history of technology. "There are 100
ways that this process could go wrong."
And even if an innovation boom occurs globally, the U.S. could still not get the full
benefit. "What we have is special and needs to be nurtured and enhanced," says
Amgen's Sharer. "Our comparative advantage could erode, and we could end up looking
like a Germany or Japan, where innovation can't get an economic return." There are
plenty of pitfalls that need to be avoided. Government funding for R&D and for graduate
science and engineering education could be squeezed by big budget deficits.
Corporations may pull back on R&D if intense price competition makes it too hard to
profitably capture the benefits of innovation.
Perhaps most worrisome, new terrorist attacks could engender even stronger security
measures and increased military action worldwide. Terror, along with the security
measures necessary to fight it, closes doors that should be open and impedes the free
flow of ideas, goods, and people.
Such impediments would be a disaster since global innovation offers some of the best
hope for breakthroughs in sectors where innovation has dragged. For example, the
gasoline-powered internal combustion engine has long been the mainstay for the auto
industry. Since 1929, there has been a lot of incremental progress, such as automatic
transmissions and fuel-injected engines, but most motor vehicles still run on petroleum
products, despite their environmental disadvantages and the need to import large
quantities of oil. To shake this technological inertia, and move to new forms of propulsion
-- whether they are gas-electric hybrids, more efficient and less polluting diesels, or
hydrogen-powered cars -- will require the combined competitive efforts of U.S.,
European, and Asian auto makers.
More broadly, global R&D increases the odds of a revolution in energy generation and
distribution, where the lack of change has been truly astonishing. In 1973, before the
energy crisis of the 1970s, fossil fuels such as natural gas, gasoline, and coal accounted
for 93% of all energy consumed in the U.S. Today, 30 years later, such "old technology"
fuels still provide 86% of U.S. energy.
NO CRYSTAL BALL
Equally important, nuclear power -- one of the biggest technological advances, and
supposedly the ultimate source of cheap power when it was introduced in the 1950s --
turned out to be a bust. By the mid-'70s it was clear that nuclear power was far too
expensive and too unsafe, and despite the high price of oil, U.S. utilities stopped
ordering new nuclear plants after 1978. That was the high-water mark for energy
innovation in the post-war era.
But the frontiers of energy technology have finally started to move forward again, and it's
a global effort. The leaders in solar power include Sharp from Japan and BP, as well as
less well-known american companies such as Konarka Technologies and Nanosolar.
Research in renewable energy such as wind power is done around the world. And even
in nuclear power there are signs of change. China and South Africa are planning to test
nuclear reactors of a new design that could be safer and more efficient, and researchers
continue to explore nuclear fusion.
It's telling that the first issue of BusinessWeek includes a full-page advertisement from
Pacific Gas & Electric Co. (PCG ), enticing manufacturers to the San Francisco area by
offering them natural gas to power their factories, a technology that is still in use. By
comparison, the ad in the same issue from International Business Machines shows off
pictures of "accounting machines" that are antiques today.
There's a lesson here. In 1929, no one could have predicted that IBM's (IBM ) "electric
sorting machines" would morph into today's lightning-fast computers. Today, no one can
predict the changes that might come over the next 75 years.
Ultimately, innovation is about continually pushing back the boundaries of what is
possible. The true genius of capitalism is that it provides economic incentives for
sustained innovation. Will the Information Revolution be followed by a Biotech or Energy
or Nano Revolution? No one knows. But with more and more smart people around the
world working on new technologies -- and the lure of riches if they succeed -- the odds
are looking better than ever.