Are We Innovating or Stagnating?

Has America, the first country to put a man on the moon, lost its innovative edge?

A recent op-ed in the Financial Times from chess champion Garry Kasparov and PayPal founder Peter Thiel wonders why, in a world where "we can now use our phones to send cute kitten photos around the world," we cannot protect ourselves from earthquakes and hurricanes. They lament a culture of incrementalism, governments that perpetuate problems, and a Wall Street that focuses on the short term. And they aren't alone in decrying America's lack of innovation.

While some of their points are valid, it seems Kasparov and Thiel failed to step out of their offices and look around: We're transforming our future with better medicineshared and self-driving cars, and wearable computing. The issue is that measuring innovation is nearly impossible.

Some methods that try to measure innovation include:

  • Number of patents. The quality of patents, however, is difficult to measure, so even if the number of patented rounded rectangles increases, innovation may be stagnant:
  • Research and development spending. Unfortunately, money spent on research doesn't automatically generate innovation, and different industries require different investments in order to reach breakthroughs. Looking at trends, the annual growth in U.S. R&D spending was between 3% and 5% over the past decade, compared with the historical average of 6% to 8%. However, out of the top 10 global R&D spenders, North American companies took five spots:
    Rank Company 2011 R&D Spending (billions)
    R&D as a Percent of Sales
    1 Toyota (NYSE: TM  ) $9.9   4.2%
    2 Novartis (NYSE: NVS  ) $9.6  16.4% 
    3 Roche (NASDAQOTH: RHHBY  ) $9.4  19.6% 
    4 Pfizer (NYSE: PFE  ) $9.1  13.5% 
    5 Microsoft (Nasdaq: MSFT  ) $9 12.9% 

    Source: "The Global Innovation 1000," Booz & Company.

  • Revenue from products less than five years old. This metric can easily be gamed through issuing a new product identifier for an aging product. Additionally, it may take many years before a revolutionary product becomes commercially successful.
  • Corporate cash levels. If a company sees plenty of incredible investment opportunities, it won't hoard cash. That is not what has been occurring. To safeguard themselves from another economic downturn, and for fear of expanding operations right before another recession, corporations are staying liquid. For example, General Electric has piled on its cash and equivalents from less than $25 billion before 2009 to more than $85 billion today.
  • Innovation indexes. These combine a number of factors like those above to mitigate any single metric's potential failings. According to one such index, the Global Innovation Index published by INSEAD and the World Intellectual Property Organization, the U.S. is ranked 10th and tied with Luxembourg, while Switzerland, Sweden, and Singapore lead.

In the end, there are enough studies and measures that it's possible for each side of the innovation argument to find supporting evidence. One example: Smartphones took less than five years to reach 40% market penetration, compared to nearly 40 years for the regular telephone -- but is the smartphone really that revolutionary, or is it just an improvement over the telephone?

There are issues that both sides can agree on. Short-term planning that boosts numbers for next quarter without considering the long term isn't good for innovation. There are companies with the exact opposite view, such as Amazon.com (Nasdaq: AMZN  ) , led by CEO Jeff Bezos. The company barely squeaks out a profit, and in the last quarter it actually posted a loss. But the company pours money into building out its infrastructure, which Amazon shareholders say will lead to plenty of profit in years to come.

Additionally, both sides can agree on the importance of education, but just what to teach and how to teach it remain at question. President Obama is stressing the importance of STEM, or science, technology, engineering, and mathematics. Peter Thiel, meanwhile, has offered $100,000 to kids under 20 to drop out of school and pursue their own entrepreneurial ideas.

There are always big ideas. Some of them prove revolutionary. Some prove revolutionary and profitable. Others are passed up. The pace of innovation can be viewed either way. You can't force innovation, but you can provide the ecosystem where it will thrive, with less of a focus on immediate results and a better-educated population.

You can learn how to profit from one such disruptive innovation with our new report, "3 Stocks to Own for the New Industrial Revolution." They're the biggest industry disruptors we've seen since the personal computer, and you can read more about them in our free analyst report. Click here to learn more.


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