Can America Innovate Itself Out of Stagnation?

One of the greatest fears of many economists is that the financial recovery of the United States will be doomed to the same fate Japan's economy once faced: a decade or more of stagnant growth.

Despite the fact that there are major differences between the U.S. economy and the Japanese economy, the U.S. may be vulnerable to the same unconventional cause that sealed Japan's fate. This is according to Clayton Christensen, Harvard Business School professor, author of The Innovator's Dilemma, and the foremost expert on innovation in the U.S., who recently visited The Motley Fool headquarters.

That unconventional cause is innovation stagnation. According to Christensen, every industry that constituted the engine of Japan's economic miracle was "disruptive."

That is to say, companies started competing in Japan's market from the bottom and rapidly worked their way to the top of the market through innovation, transforming industries whose products historically were complicated and expensive into something affordable and simpler for a much larger population. By that point, companies had finally reached the promised land of high margins at the upper end of the market.

At the same time, Korea, Taiwan, and Singapore came in on the low end of the very industries that had propelled Japan's growth, stealing those markets. Now enter China and India from the bottom, which are racing upmarket as fast as possible.

"It wasn't just Toyota (NYSE: TM  ) that [stole the market from] General Motors," said Christensen. "Honda (NYSE: HMC  ) did it to the motorcycle industry, Canon (NYSE: CAJ  ) did it to Xerox (NYSE: XRX  ) , Sony (NYSE: SNE  ) did it to RCA, Mitsui did it to shipbuilding, and by 1990, those companies had gone from the low end to the high end of the market. There just wasn't anywhere to go."

This is evidence, according to Christensen, that there really are microeconomic roots to countries' macroeconomic prosperity and stagnation. "I really worry about America because there's nowhere to go," he said.

Now turn to the U.S.
Christensen says the U.S. economy got disrupted out of manufacturing by the Japanese and that now we're getting disrupted out of engineering and creativity by India. "We've led the world in technology not because the Americans are technologists," he said. "We've just been a magnet for the best in the world, and now if our immigration policy tries to systematically turn those immigrants [away], and they can't come here -- or they don't come here -- I really worry what will become of us."

Indeed, Christensen is not the only expert who is worried about this scenario. Charles Geisst -- the man who called the 2008 financial meltdown four years prior in a book called Undue Influence: How the Wall Street Elite Puts the Financial System at Risk and a professor of finance at Manhattan College -- told me in an interview that he thinks a Japan scenario could be on the table for the U.S. economy.

Tyler Cowen, George Mason University professor of economics and co-creator of the popular economics blog marginalrevolution.com, has a slightly different spin on innovation, pointing out that the current crisis is fundamentally about the real economy.

Cowen points to recent innovations like the Web as things that are life-enhancing but not necessarily substantial creators of jobs or revenue in the real economy. To Cowen's point, maybe the stagnation Christensen and Geisst predict has already happened. Cowen notes that about 10 years ago, the real economy began to stagnate because revenue models crashed. As a result, banks like Citigroup (NYSE: C  ) and Bear Stearns (now owned by JPMorgan Chase (NYSE: JPM  ) ) sought to innovate in areas like subprime mortgage securities that provide debatable benefits to the real economy.

Those are the thoughts of Christensen, Geisst, and Cowen, but we'll let you have the final word. Share your insights on innovation and a possible lost decade in the U.S. in the comments section below.

For Related Foolishness:

Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy.


Read/Post Comments (25) | Recommend This Article (41)

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  • Report this Comment On October 22, 2009, at 3:03 PM, liveoilfree wrote:

    The people are willing and able to meet the challenges and create new industries; it's the corporate forces of stagnation that suborn the elected officials and make the oil economy inescapeable. It's Big Oil, their bribes and influence that's killing the US. Until and unless we prosecute and cast out the Big Oil evildoers, the downward spiral will continue. So-called "free trade" is just a monicker for sending jobs and money overseas under the control of "multi-national" traitors like Chevron, Exxon, Wal-Crap and all the other scheming snakes. What's killing plug-in cars? Chevron openly cooperated with GM to kill the NiMH battery needed for plug-in cars. What's stopping solar power? Look at the evil Coal companies.

  • Report this Comment On October 22, 2009, at 3:24 PM, mktcorreo wrote:

    Can American do it? Yes....

    Do American managers have the will to do it? No.

    The current generation of American of managers (except for Steve Jobs) know only how to cut and not how to create. So profits come through cuts. That is, cuts in human capital, cuts in research, cuts in innovation. Until the current generation of managers dies and a new comes around that grow companies through investment in innovation the answer for this generation is no.

  • Report this Comment On October 22, 2009, at 5:08 PM, Midas5280 wrote:

    In most businesses, knowing what to kiss and win has replaced commonsense qualifications. There is no substance anymore and anyone who speaks out about anything is out the door. We are a society of warm and fuzzy kissups instead of doers. I have witnessed decent, quality people shown the door simply because they were a perceived threat to the status quo. They spoke out or up, desperately trying to change a bad process or questionable ethics, only to find themselves unemployed. Nursing is a particular field in which this happens everyday. At no point in my life have I seen such blatant incompetence in everything. Anyone can graduate from college because college itself has become big business. Healthcare is not about health or care; rather it is about dollars, big business, and big pharma. I have little hope the situation will turn around in my lifetime. We, as a society, have taken our freedoms for granted and we are going to pay a very dear price for our "head-in-the-sand" stance for the last several years. I have lost count of the number of people who have stated they are glad to be the age they are (40 or >) because they do not want to have to live in a country likely to have someone else's flag overhead. Many feel China owns us and we have no way out at this point, and eventually we will see red on our own soil.

  • Report this Comment On October 22, 2009, at 6:05 PM, IIcx wrote:

    He's right as far as he goes but didn't mention that a portion of the major innovations end up locked down in government agencies for 10+ years before becoming available to the market.

    As I understand it, the mechanism for the transfer of bits and pieces of the original innovation to companies of all sizes is the Technology Transfer Program.

    This is a major issue for the health and safety of our country but it should be reviewed from time to time to see if there's a better way to manage the transfer of innovations that are being developed and underwritten with our tax dollars.

  • Report this Comment On October 22, 2009, at 6:38 PM, IIcx wrote:

    Government agencies and research support is a more positive way to look at my last comment. Here are just a few examples.

    NASA and CalTech: http://www.spitzer.caltech.edu/about/innovations.shtml

    CERN and CalTech: http://www.innovations-report.com/html/reports/information_t...

    U.S. Department of Energy-funded artificial-retina project and CalTech: http://www.azooptics.com/details.asp?NewsID=4598

    MIT: http://web.mit.edu/newsoffice/topic/innovation.html

  • Report this Comment On October 22, 2009, at 7:57 PM, IIcx wrote:

    I came back and read the article again and discovered I'd mixed up Innovation and Invention. R&D is typically associated with Invention.

    Innovation is the commercialism of an existing artifact or service.

    Invention refers to new concepts or new ideas that result in a new artifact or service

    The statement "Can America Innovate Itself Out of Stagnation" implies the notion that we should be repackaging existing inventions in innovative ways.

    I'm trying to understand why Professor Christensen feels innovation is a microeconomic factor that has any limits. Is he saying that product and packaging designers as well as marketing professionals have lost their creativity and, even if this were true, why would it have a macroeconomic effect?

    There's no question that the outsourcing that occurred in the last century impacted educational programs and in turn impacted entire disciplines in engineering. Audio engineering is a good example.

    Lets face it, why would universities choose to teach an engineering discipline like audio engineering when there simply wasn't any job opportunity for graduates. Yet, this didn't have any effect on the invention of digital audio, mp3, and ultimately digital audio products like the iPod.

    The iPod, by the way, is a good example of a product that repackages existing inventions in an innovative way.

    "Cowen points to recent innovations like the Web as things that are life-enhancing but not necessarily substantial creators of jobs or revenue in the real economy." Ok, now I'm scratching my head. Did a Harvard professor really say this preposterous statement? Hello, what does he think the "Click" is in "Brick and Click"? Also, the internet was the first economic equalizer for small business. Without it, most small business would go unnoticed due to their inability to afford National advertising.

    If his point is that every thing got screwed up 10 years ago by Harvard MBAs - I'd have to agree. They should make courses in Ethics mandatory for an MBA degree.

    What will take us to a new level are invention and innovation, both are valuable and both are limitless when utilized by the right individuals but neither, IMHO, has anything to do with economic stagnation.

  • Report this Comment On October 22, 2009, at 8:14 PM, DDHv wrote:

    There is still innovation. However, too little of it is getting into mass production to make it available to most of the people.

    Too many of us are concentrating on survival, rather than improvement. Sometimes from necessity, sometimes from unwillingness to change.

  • Report this Comment On October 22, 2009, at 9:48 PM, fatdiesel wrote:

    Innovate? Innovate? Innovate?

    What we need are brand new industries to replace existing ones. The protectionism of older industries is what is stagnating our nation. Where's the creative destruction?

    Also, I'd feel a lot more motivated to create something if tax rates weren't so high.

  • Report this Comment On October 22, 2009, at 10:17 PM, xetn wrote:

    I think it is interesting that China is becoming more like America and America is becoming more like China.

    Contrast: The top officials of the Chinese government are constantly going around the country encouraging more entrepreneurial activity by everyone, while others are going all over the world negotiation trade agreements and stockpiling much needed commodities such as cooper, iron ore, coal, and oil.

    In the US, it has become the norm for the president, member of congress and the press to continually condemn private enterprise and to make everyone think that all members of private enterprise are crooks. They are constantly taking money out of the private sector to spend on failing businesses, while expanding all manner of government interventions of more regulation, taxes and trade tariffs.

    And people wonder why all the important manufacturing jobs are fleeing the US and there is little incentive for invention and innovation.

    Private enterprise used to be the driving force in the making of the prosperity of the US. Now it is choked to death by the government. While failing enterprises are deemed "to-big-to-fail" and are propped up.

  • Report this Comment On October 22, 2009, at 10:34 PM, Greg155 wrote:

    The future of jobs and hence prosperity is the conversion of our energy system to non fossil fuels. . This will be the next industrial revolution. The research and technology and then the build out of the system for power and transportation. It will eventually happen despite those who try to hold us back.

    Greg

  • Report this Comment On October 22, 2009, at 10:53 PM, IIcx wrote:

    This blog for me is so to a topic we poorly define as a nation and thus the cause of serious concern. When did the "economy" became an intangible.

    I lived the tail-end of the industrial revolution and saw the rust belt emerge for all the wrong reasons.

    I've had the insightful experience to define product without the "aid" of a computer and know the tragic difference between people who can do the job with the lights on or off.

    We moved from Industrial age to the Information age to the Nano age to quickly. We simply aren't adult as a society, as nations, and as a wold to take the next step.

    The best "Innovation" I'd like to see from the United Nations is a decree that until we grow up, the Internet will be turned OFF.

    That's an "innovation" every human being will applaud.

  • Report this Comment On October 22, 2009, at 11:06 PM, IIcx wrote:

    Perhaps the better way to say it is unplug and if you want to save the world, start with you household and your neighborhood.

    I'm looking forward to someone who can properly define neighborhood. A favorite market research study in my youth ;)

    PS absolute favorite answer was from an individual who rented an apartment in a high-rise and defined main street and his "neighborhoods" hallway.

    The professor needs to get out more or be more creative?

  • Report this Comment On October 23, 2009, at 9:54 AM, ws6transam wrote:

    I want to recommend this article purely so that readers get the opportunity to view the above comments.

    Especially the ones by llcx and xetn. Good objective, thoughtful, and optimistic analysis. Optimism is the linchpin of innovation.

  • Report this Comment On October 23, 2009, at 10:30 AM, Gorm wrote:

    Our world has changed and we have NOT reacted responsibly.

    Rather than innovate and adjust to outside pressures we allowed industries to abandon the US and domicile elsewhere. We rationalized that we were evolving from an industrial base to an information based economy, like "things" didn't matter anymore.

    In our global economy there is NOTHING that holds corporations to domicile here. We used to be the "hub" of consumption and the most plausible area to headquarter.

    NOW, as is in MI where business leaves because MI is NOT business friendly, the same can happen to the US.

    Look at our leadership. Congress does not proact. It doesn't even react until we reach a crisis stage. Look at jobs, manufacturing, energy independence, health care, entitlements, deficits for examples.

    Our leadership sees no difference between spending and investment, or effort and success. We waste time and resources chasing symptoms vs core problems. I think it is because they are too gutless. I have long held we vote in our brightest and hold them to term limits where they are given an opportunity to make their mark and return to private industry. Our corrupt leadership is not interested to looking ahead and protecting our interests, our way of life, our standard of living but only in two things, ie getting elected and getting re-elected. Unfortunately, as a society we are too apathetic to do a thing about what we see and experience. I expect no change in performance until I see a material change in the public's expectations.

  • Report this Comment On October 23, 2009, at 10:31 AM, Gorm wrote:

    Our world has changed and we have NOT reacted responsibly.

    Rather than innovate and adjust to outside pressures we allowed industries to abandon the US and domicile elsewhere. We rationalized that we were evolving from an industrial base to an information based economy, like "things" didn't matter anymore.

    In our global economy there is NOTHING that holds corporations to domicile here. We used to be the "hub" of consumption and the most plausible area to headquarter.

    NOW, as is in MI where business leaves because MI is NOT business friendly, the same can happen to the US.

    Look at our leadership. Congress does not proact. It doesn't even react until we reach a crisis stage. Look at jobs, manufacturing, energy independence, health care, entitlements, deficits for examples.

    Our leadership sees no difference between spending and investment, or effort and success. We waste time and resources chasing symptoms vs core problems. I think it is because they are too gutless. I have long held we vote in our brightest and hold them to term limits where they are given an opportunity to make their mark and return to private industry. Our corrupt leadership is not interested to looking ahead and protecting our interests, our way of life, our standard of living but only in two things, ie getting elected and getting re-elected. Unfortunately, as a society we are too apathetic to do a thing about what we see and experience. I expect no change in performance until I see a material change in the public's expectations.

  • Report this Comment On October 24, 2009, at 1:32 AM, burrowsx wrote:

    1. We do not encourage our children to take risks, nor (as we once did in the 1950's) put a premium on science and engineering knowledge as a matter of national defense. Instead of encouraging real literacy and intellectual curiosity, we kill their creativity by testing reading scores and teaching to the tests. Instead of encouraging scientific curiosity and mathematical investigation, we turn fascinating material into rote memory drills. We will not innovate until we stop being afraid to teach innovation.

    2. The United States is taxed less than virtually any first world economy. Please, no more deficit inducing tax cuts. Please use cheap government workers instead of expensive outsourced contractors (who were trained at my expense as government workers, and left by way of the revolving door, to become those expensive government contractors)

    3. It is time that the whole world started trust busting, to free the nimble innovators of the future from the hidebound bureaucracy of too big to fail.

  • Report this Comment On October 24, 2009, at 10:37 AM, kamuirei wrote:

    @llcx

    "If his point is that every thing got screwed up 10 years ago by Harvard MBAs - I'd have to agree. They should make courses in Ethics mandatory for an MBA degree."

    As an undergrad, one of my friends had the pleasure of being in a business ethics course. 1/4 of the students failed for cheating. I think this says something about the ethics of most business students.

  • Report this Comment On October 24, 2009, at 8:31 PM, theHedgehog wrote:

    There are two issues at play here: First is that of the race to the bottom mentioned by Ms Schonberger. Even the great WEB, himself, said there is no point in competing on the price point if someone else can just come along and change the price.

    Secondly is that almost everything is a commodity, anymore. Sure, we're speeding up computers, but that is a low margin business, now. Actually, anything computer related that isn't painted white and made by Apple is in a race to the bottom, and in a race to the bottom, nobody wins but the consumer - until the monopolies are formed.

    So, the real question is where we really stand WRT monopolies. The Microsoft cases pretty much lay that out: America is for them, and the EU is against them. Since this only has the effect of raising prices in the US, that doesn't help, as what we really need are things we can export.

    My reluctant conclusion is that I have to affirm the author's story: Japan has shown the future, and it is one of serial stagnation as each successive emerging nation's infrastructure is built up and their citizens standard of living reaches some (serially declining) tipping point where they, too, switch from an export an to import economy.

  • Report this Comment On October 25, 2009, at 2:25 AM, soloadventurer wrote:

    Technology development is often assumed to occur in a vacuum, add HR1 visa and stir. The physical infrastructure required for high-tech manufacturing is hugely expensive, materials innovation is based on the technological capabilities of available equipment. Off-shoring will, over the long term, have an effect on competitiveness and innovation. Universities and mil-aero firms have the infrastructure required for proof-of-concept, however volume manufacturing is often a much different matter. As the mil-aero markets lower volume, and less cost sensitive, it's not surprising that technology development in these applications is easier to fund and deploy. Putting aside the obvious question of how well technology development is managed in US firms (a big ?), US capital markets are not friendly to small scale technology innovators... risk is high, lead-times long, marketing barriers formidable.. the proverbial salmon swimming up stream. So it's not surprising that internet software development has been a focus in recent years as the entry barriers are, relatively, lower. In short, the overall trend in US competitiveness is not favorable, nor easy to reverse.

  • Report this Comment On October 25, 2009, at 4:18 AM, benfranc wrote:

    This is the only country that has a economy dynamic enough to pull it off. But the federal government is walking a fine line between making the same mistakes japan made and letting free enterprise fix the economy.

    http://www.reverbnation.com/benfranc

  • Report this Comment On October 27, 2009, at 5:17 PM, IIcx wrote:

    benfranc has a good point - it wasn't apathy, laziness, the lack of creativity, or success that caused Japan's inflation and economy stagnation. It was their banking practices that instituted "no investor is to small to fail".

    Osaka, Japan is one of the most amazing locations for Design and Industrial engineering in the world. So, it certainly wasn't due to the lack of innovation or invention.

    Many have also commented that the true cause includes inhibiting factors imposed by lack of education, poor management, industrial monopoly, and government.

    So I guess the real question is, who should sponsor a national competition to acquire the innovations and eliminate the inhibiting factors by making the information and process for delivery transparent to the public?

  • Report this Comment On October 27, 2009, at 9:37 PM, IIcx wrote:

    Economic Stagnation starts and stops with CEOs and their business model. That was and will be the cause of economic stagnation -- short of the "wack-a-loons" in government who tax the life out of every opportunity.

  • Report this Comment On October 28, 2009, at 2:19 PM, Darwood11 wrote:

    The U.S. is becoming more like the South Korean Chaebol model, where government is now actively supporting certain businesses and unions.

  • Report this Comment On October 28, 2009, at 3:29 PM, miteycasey wrote:

    The future of jobs and hence prosperity is the conversion of our energy system to non fossil fuels. .

    I don't understand this line of thinking.

    If one bit of energy costs .02 from fossil fuels

    and one bit of energy costs .02 from solar/thermal/etc. how is that any different?

    Now if you want to argue 50 years down the road one bit of energy will cost .03 from fossil fules and .02 from others I can agree.

    BUT the energy costs to businesses will not change in the short term.

  • Report this Comment On October 30, 2009, at 1:45 PM, interdependent wrote:

    How do we get to the future faster?

    The government did not choke GM to death. How did that big wooly mammoth end up owned by the government after years of lobbying to dominate the auto industry? By protecting their interests and destroying competition as long as possible. So one hundred years later we still drive new improved gasoline cars. We've been to the moon since then.

    Innovation?

    The future belongs to renewable clean energy, which is still more expensive, if only because burning fossil fuels for 150 years has dangerously changed the atmosphere of the Earth and we're burning more everyday.

    With exponential population growth and activity testing the carrying capacity of our only habitat, BURNING buried carbon is just one way we will certainly destroy ourselves.

    How do we save ourselves?

    Stop eating meat, stop driving gas cars, stop using electricity from coal, plant a garden and eat from the backyard. And if that sounds too hard...

    Innovate!

    Visit www.350.org to learn more about reversing climate change.

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