Revving Up America's Innovation Engine

Wednesday, November 9, 2011
Commonwealth Club of Silicon Valley

Let me start the evening off by talking a bit about America's innovation economy – how it emerged, how it's working, and some steps we can take to strengthen it. As I step into this discussion of the innovation economy, I should acknowledge the obvious: I am neither an entrepreneur nor an economist. I have no high-tech innovations up my sleeve, and bringing ideas on innovation to Silicon Valley seems like a 21st-century version of bringing coals to Newcastle.

I do, however, have the privilege of leading one of the nation's premier research universities, focused on engineering and science, which gives me an unusual perspective on what makes our innovation economy work. Today, the country is understandably preoccupied with just one question: Where will the much-needed jobs come from? At such a moment, there may be no more important subject than how we can retool the innovation engine that has driven wave after wave of US economic and jobs growth since the end of World War II, and that along the way helped produce Silicon Valley, one of the industrial wonders of the world.
First – what do I mean by innovation? Our innovation system comes to life from the spark of scientific discovery and invention. Yet the kind of innovation that drives real economic growth goes beyond a cool idea or an incremental improvement on an old practice or product. I mean the kind of innovations that produce big new ideas, based in science or technology, that can be transformed into marketable products – innovations that can create new markets, sometimes even new industries, and that create a future different from, and better than, the present.
You might be surprised by how many such innovations were seeded with federal research funding. Innovations like real-time, networked computing, a radical advance that transformed computers from overgrown calculators used by a handful of scientists into the communications infrastructure of our entire society. Or PET scans, that allow doctors to pinpoint malignant tumors without invasive procedures. Or lasers, which not so long ago were arcane scientific tools. No one knew then what they'd be good for, but they now lend their power to mere mortals, as we scan barcodes at the checkout counter, burn CDs, or have our vision corrected. Or GPS, a technology invented for positioning nuclear missiles that now offers a universal tool to find your way to a hospital, a job interview or the nearest Starbucks. Or eBooks, that enable us to carry everywhere more books than we will ever have time to read. Or, most recently, "Siri," the eerily effective, voice-activated personal assistant in the iPhone 4S – perhaps sitting in your pocket right now – that evolved from a DARPA project to improve decision making on the battlefield.
Today, all of these life-changing, market-rocking innovations have become routine tools, and they all have something in common: they grew out of advanced research at American universities, supported by federal research dollars, and they were translated into market-ready ideas by American entrepreneurs and companies that have made a dramatic impact on our economy. That is America's innovation system at work, and it's important to understand that it did not happen by accident. In fact, it is a direct descendant of the investment-based research and development system the US invented to develop the technologies, like radar and the atomic bomb, that won World War II.
Three sets of investments drove the economic growth in the US following World War II. First, presidents Truman and Eisenhower, working with Congress and guided by visionary scientific advisors, recognized that the same strategy of investing in advanced scientific research that had produced incredible, war-winning results could produce technologies that could win in peacetime, too. Other nations funded research, but at a lower level and mainly at freestanding research institutes; by contrast, the US focused its research investments on peer-reviewed, university-based research. From California and Texas to Michigan and Massachusetts, universities competed for federal funds, on the scientific merits. Ultimately, those federal investments re-invented American universities as powerhouses of modern scientific and technological research.
The second investment, in education, built on the first. In response to Cold War fears about Soviet scientific dominance, fears crystallized by Sputnik, the National Defense Education Act of 1958 drove aggressive investments in science and math education, directing close to a billion dollars to student loans, fellowships, K-through-12 science and math instruction, and something we used to call "vo-tech," or vocational and technical, training. The third investment amplified the power of the first two: with the passage of the 1965 Immigration and Nationality Act, the relative openness of our culture to immigrant talent – to brilliant strivers from other places – turned our universities into even more powerful magnets for the world's most ambitious scientists, engineers, inventors and entrepreneurs.
These three investments produced ideas that flowed out of academic labs and into the marketplace and helped deliver huge gains in productivity and employment, by fueling one innovation wave after another: Electronics and semiconductors in the 1960's and 70's; mainframe and mini-computers in the 70's and 80's; personal computing and the Internet in the 90's, and biotech in the late 1990's. In fact, economists have shown that since World War II, more than half of US economic growth can be attributed to technological innovation, much of it springing from federally funded, advanced scientific research.
Silicon Valley stands as a testament to the cumulative effect of the IT wave that crested in the 1990's, surely one of the most successful periods in US economic history. From 1995 through 2000, the US sustained annual GDP growth of 4.2% and productivity growth of 3.5%, stunning increases for a mature economy. Everyone saw real income growth, not just those at the very top. The IT wave also had a transformative impact on jobs: over the decade of the 1990s, the US economy created 22 million net new jobs, or 2.2 million new jobs a year. Comparing that to our current lackluster jobs growth only underscores the importance of the innovation agenda today. What's more, it will not surprise anyone here that technology–based companies have a disproportionately positive impact on their local economies. When they sell products into national and global markets, they draw money into the local economy from outside, unlike a new service-based company, like a dry cleaner or restaurant. Those external markets give technology-based firms the capital to scale up, another powerful engine of job creation.
There's a particularly important final link in the chain. During many research-based revolutions – until the most recent one, actually – we not only made the ideas here, we actually made the products here, too. Just one example: semiconductors were the core technology behind the IT wave, and we made them here; when Japanese competitors moved ahead, the US sector took on the challenge. By inventing new manufacturing processes for equipment suppliers, the public/private partnership known as Sematech recaptured the technological lead. This inspired consortium explains why US semiconductor firms still lead world markets.
The great question remains: if our innovation system has such power, where is it now, when we really need it? How can we crank it up to produce more new, job-generating, economy-building companies? I am happy to report that our innovation system is alive, and mostly well. At the same time, I believe that we could make it much more effective by reexamining and recommitting ourselves to the elements that made it so powerful in previous periods of economic growth. There are lots of lessons to be learned from the last half century of innovation waves, but I think there are four rules, or principles, that can help us focus on a plan of action.
Rule One: Growing new ideas takes money, from the right source at the right time.
There is surely a "right time" for venture capital to back a new idea, and California happens to be the number-one magnet for VC money in the country. Yet venture capital is hardly an unwavering resource: A new report reveals that from 2007 to 2010, investment by US venture capitalists dropped 26%. That is not a direction that bodes for future success. The truth is that, well before VC dollars get into the game, if we want big, breakthrough innovations to drive our economy, there is no substitute for strong, sustained federal funding for advanced, early-stage research. In 2009, for instance, more than half of academic research and development in California was paid for by the federal government. Sustained federal funding through the second half of the 20th century generated the breakthroughs that unleashed the IT and biotech innovation waves. Today, there are new technology sectors ready to launch: clean energy, robotics, advanced materials, the convergence of the life and engineering sciences in biomedicine and beyond. They are poised to drive new innovation waves and the jobs that go with them. The ownership of these innovation waves, however, still hangs in the balance: Will we let other nations lead them, or will we seize the potential for American economic growth and American jobs? If we let Congress slash funding for advanced research, we will lose our advantage in the next job-creating waves of innovation.
As the Congressional Supercommittee approaches its Thanksgiving deadline, and the threat of "sequestration" seems perilously real, the public needs to understand that the anticipated impact on research funding would be devastating: a 10% cut that gets locked in, with stagnation for a decade. Institutions like UC Berkeley, Stanford, UCSF and MIT gave the US its innovation edge; undercutting national investments in fundamental research could mean kissing future prosperity goodbye.
Rule Two: If you want your innovation system to thrive, attract brilliant strivers, and help them get all the education and hands-on experience they can handle.
We need to capitalize on this country's ability to attract talent from all over the world, a secret of America's success for centuries. You all know this statistic: more than half of Silicon Valley start-ups are launched by people who were born outside the United States. At MIT, 40% of our current faculty members were born abroad. Nationally, in electrical and electronics engineering, 55% of masters graduates and 63% of new PhDs are foreign nationals. Yet amazingly, if as incoming students they had told US immigration that they hoped to stay after graduation to start a company and create US jobs, they would have been turned back at the border. Our immigration laws specifically require that students return to their home countries after earning their degrees and then apply for a visa if they want to return and work in the United States. Why in the world would we drive away the young talent we work so hard to educate? It would be difficult to invent a policy more counterproductive to our national interest.
Not so long ago, if you wanted to pursue advanced science and engineering, the US was your only good choice, and foreign graduates of MIT, Berkeley, Stanford and other great universities would put up with the indignities of the US immigration system to stay here. A third of all the science and engineering degrees awarded in the US go to foreign students. But between 2000 and 2007, the percentage of graduate students from China, India, Korea, Japan and Canada with definite plans to stay in the US declined. I hate to think what the recession has done to these numbers since. Our ability to capture world talent has been a remarkable US competitive advantage for two centuries; it would be tragic to lose it. In a world now teeming with well-funded venues for doing first-class research, the cumbersome rigidity of our immigration system has become a liability. To be competitive, the US needs to send the unambiguous message that we want international scholars to stay. We should insist that Congress revamp our arcane immigration laws to encourage newly educated talent from around the world to remain in the United States.
We also need to encourage our homegrown "brilliant strivers." We must dramatically improve science, math and engineering education, and increase the number of US graduates in these fields. At MIT, about 85% of the bachelor's degrees we award each year are in engineering or the natural sciences; that holds for both men and women. We are anomalous, however, when across America only 15% of bachelor's degrees are awarded in these fields. The US now trails more than 16 nations in Europe and Asia in the proportion of 24-year-olds with bachelor's degrees in engineering and the natural sciences. What's more, from 1989 to 2003, the number of American science and engineering PhDs remained constant, at an average of 26,600 a year; over the same period, in the same fields, PhDs awarded in China shot up from 1,000 to 12,000. The trend speaks for itself.
Rule Three: Scientists and engineers can make great entrepreneurs – but an entrepreneurial culture helps them flourish. 
Entrepreneurship is critically important. Without entrepreneurs with the drive and persistence to carry new ideas all the way to the market, an "innovation" is just a gizmo gathering dust in the lab. Entrepreneurship is vitally important to the jobs question, too: Economists with the Kauffman Foundation have determined that the companies that produce the most jobs are new ones. They report that since 1980, nearly all net job creation has come from companies less than five years old.
Some people argue that entrepreneurs are born and not made, but our experience at MIT matches what you know in Silicon Valley: that an entrepreneurial culture – one that encourages new ideas, permits mistakes, and makes it easy to connect to talent and money – can make a tremendous difference. Every research university, public and private, can do more to build up its entrepreneurial culture. Let me suggest just a few areas where universities can make a tremendous difference: Encouraging faculty and students to launch start-ups, and build curricula and mentor networks to teach them how. Licensing technology seamlessly and fast, to get products into the market. Running start-up competitions to inspire, test-drive and showcase entrepreneurial teams. And organizing alumni entrepreneurs to advise the fledgling ones. They do it for free, and then they thank you for the opportunity.
That last idea may sound crazy, but at MIT, our Venture Mentoring Service, started and run by alumni volunteers with less than $3 million in funding over 10 years, has helped launch 142 ventures that have raised $850 million in external financing. Our "VMS" has also helped more than 20 other groups launch their own venture mentoring services, at the University of Miami and Mississippi State, and at economic development agencies in St. Louis and Chicago.
MIT runs another breakthrough program – the Deshpande Center for Technological Innovation. Our brilliant faculty often have no experience with writing business plans or starting companies, so the Deshpande Center supplies them with start-up funds, expert mentors and the guidance to launch their own firms. In the last nine years the Deshpande Center has provided about $11 million to fund more than 90 projects and seen the creation of 26 companies, which have raised more than $350 million in outside financing.
Finally, Rule Four: If we want to make US jobs, we can't just make ideas here – we have to make the products here.
Many people I talk to about manufacturing are convinced that nothing is 'Made in America' anymore. But the truth is that the US remains the world's second largest manufacturer, and manufacturing is still vital to our economy. In 2007, manufacturing contributed $1.6 trillion, or 13.4%, to our GDP. 
It provides 12 million direct production jobs and something on the order of another 30 million US jobs that depend on manufacturing. Manufacturing jobs are not only good in themselves: the health of this sector figures prominently in our innovation capacity. In fact, US manufacturing firms employ 64% of America's scientists and engineers, and they conduct 70% of US R&D. Unfortunately, the challenges for US manufacturing are profound and frustratingly difficult. Ten years ago, for example, we enjoyed a trade surplus in advanced technology manufactured goods. Today, that category accounts for an $81 billion annual trade deficit, meaning that we are buying back technologies that, in many cases, we invented. There is even reason to believe that by outsourcing manufacturing to lower-wage countries, US firms may have unwittingly begun to outsource our innovative capacity as well, by interrupting the two-way flow of ideas between the factory floor and the drawing board. In effect, no matter how brilliant our new innovations, they will not translate into the kind of strong, durable growth and jobs we need, unless some substantial fraction really are Made in America.
The Henry-Ford-style assembly line work is never coming back on shore, but advanced manufacturing holds real opportunities for the US. To accelerate America's progress on this new frontier, President Obama recently asked me and Dow Chemical CEO, Andrew Liveris, to co-chair the steering committee of a new industry-university-government task force called the Advanced Manufacturing Partnership, or AMP. At the six universities and 12 companies on the AMP steering committee, there's much enthusiasm, and lots of great work emerging. In every way, AMP is action-oriented, not report-oriented, and we hope to have some concrete recommendations ready by the spring.
We all recognize that the workers for this new era of advanced manufacturing will predominantly come from high schools and community colleges. Fortunately, there are some excellent models for preparing workers for 21st century manufacturing, many of them right here in California, from a hands-on engineering program I visited two years ago at Oakland Tech; to the project-based engineering and design program at New Technology High School in Napa; to the network of "High Tech High" schools in San Diego, founded in concert with the local Business Roundtable. The question is scale: how to make these programs not the exception but the rule.
I want to close with a reflection on our cultural assumptions, and a call to change them. At a recent panel on innovation, the moderator asked me why any entrepreneur would even go to college, since we all know the legends of some very successful college drop-outs. With all due respect to Peter Thiel, let me be clear: innovations that drive lasting economic growth emerge from the most advanced science, mathematics and technology. The advanced batteries that could make alternative energy a mainstream option draw on chemistry and engineering that is simply not taught in high school. As for the biological engineering that allowed Genentech to develop the first generation of biologically targeted breast cancer drugs, they don't teach that in high school either.
We need our brightest young women and men, all across the country, to value advanced education and invention as much as they love football and basketball. We need them to understand that the smart phones and video games and music players they covet were invented by real people, just like them, and that science and engineering can offer them the power to become not merely the world's consumers and spectators, but its makers and doers, the inventors and creators who will restore American prosperity.
If we hope to revive America's economic prospects, there is plenty of hard work ahead to get our innovation system humming again: leading the charge for sustained, federally funded research, reforming immigration, building entrepreneurial ecosystems, and seizing the opportunities of advanced manufacturing. I hope you will feel inspired to join us in some of these battles.
I urge you to do something simpler, too. Please, whatever your profession: Find ways to celebrate America's inventors and entrepreneurs. Make them our children's heroes today, so that today's children can be the heroes who turn the lights on in America's factories tomorrow.