Everyone has an innovation policy these days – no prime minister or president is without one. After Barack Obama’s declaration in his State of the Union address that the US faced a new “Sputnik moment”, David Cameron flew to Davos last week to insist that “our biggest ambitions have got to be for innovation”.

As a general observation, that is hard to dispute. Following the 2008 financial crisis, governments face public sector budget crises and subdued demand as consumers cut debt. They need the private sector to compensate by investing in products and services that are new and profitable enough to create highly paid jobs.

How can governments encourage them? First, they can make a big effort to raise the supply of “human capital” – also known as highly educated and motivated people – through education or immigration. Second, they can eliminate obstacles to high-growth companies that may be the next Google or Walmart.

A third, less practical, possibility would be to invest massively in the publicly funded research that is a platform for innovation. The US did so after the 1957 Sputnik crisis when it set up Darpa, a research initiative that developed the technology behind stealth aircraft, the Global Positioning System and the internet.

“The great American investment in the wellsprings of science and technology was justified to the public by the cold war,” says Bill Janeway, a managing director of Warburg Pincus, the private equity firm. Mr Janeway would like the US to try again on the basis that the private sector, left to itself, will not invest in such fundamental technologies.

But neither the US nor European countries have the budget and the political ambition to, for example, match China’s Darpa-sized bet on green energy technology. The one-off $10bn investment the US made in the National Institutes for Health, the medical research group, as part of the 2009 fiscal stimulus was a splash in the bucket by comparison.

China spends $100bn annually on R&D – about 1.5 per cent of gross domestic product – but has a target of 2.5 per cent by 2020, rivalling the US’s R&D spending of $325bn, according to the Goldman Sachs’ Global Markets Institute. Mr Obama wants to raise US R&D to 3 per cent of GDP but that is more of a US-style aspiration than a Chinese-style hard target.

Still, the fact that research is being done in Asia does not eliminate the western ability to innovate. As Amar Bhidé, a professor at Tufts university, has argued, innovation occurs in companies such as Apple that can exploit and adapt new technologies – including some from overseas – and conjure products from them.

The web browser was invented at Cern, the European physics laboratory, yet its commercial possibilities were exploited by companies including Google, whose co-founders were postgraduate students at Stanford. Silicon Valley’s strength is the combination of venture capital financing and a ready supply of software engineers, designers and marketers.

The biggest innovation challenge for the US in relation to Asia is not financial but human. China enrols 15 per cent of the world’s university students and 40 per cent of new degrees there are in science and engineering, compared with only 15 per cent in the US. Meanwhile, 68 per cent of US engineering doctorates are now awarded to non-US citizens.

The global distribution of well-educated citizens has a big impact not only on research but where innovation-intensive jobs are created. Pfizer, which this week announced it was closing its laboratory in Sandwich in the UK as part of cutbacks in early-stage research, has opened a research centre in Shanghai and partnered with Chinese universities.

Andrew Wyckoff, a director of the Organisation for Economic Co-operation and Development, points out that countries such as Finland and South Korea responded to past economic crises by investing in education and R&D. Others need to match innovation rhetoric with practical efforts to get more young people to learn science and engineering.

If they cannot educate sufficient numbers of their citizens that will put even more strain on immigration. Both Mr Obama and Mr Cameron have tried to ease curbs on engineers and entrepreneurs coming to their countries. Without such reforms, there is a danger that multinationals will take research facilities and highly paid jobs elsewhere.

The second thing that innovation-hungry western countries can do is to remove the built-in curbs – whether in the form of regulations or taxes – to higher-growth companies sometimes known as “gazelles”. The National Endowment for Science, Technology and the Arts in the UK estimates that 6 per cent of businesses created half the new private-sector jobs between 2002 and 2008.

The US is in a comparatively good position – its single market and its mature venture capital industry has a strong record of nurturing new enterprises and allowing them to grow. It will be harder for European countries that are less accustomed to wooing entrepreneurs with such incentives to adapt.

In the absence of much else inspiring to say about their troubled economies, it is only natural for political leaders to seize upon innovation as a cure-all. The test will be whether, without the public budget and autocratic determination of China, they can do much about it.


Get alerts on Columnists when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article