America's True Competitive Advantage

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Everywhere you turn, you hear of the demise of the U.S. education system. ExxonMobil recently ran television ads that say the U.S. is now 25th in math and 17th in science worldwide. Nearly every study shows that U.S. students are falling behind countries such as India, China, and South Korea in education, yet American companies seem to be holding their own against competition from these countries. The U.S. may not be making the world's most popular items, but we are inventing them. How could this be?

One major factor that these studies don't show is what the U.S. leads in: innovation. Innovation is a skill that's hard to define but easy to identify when we see it, and we see it more in the U.S. than anywhere in the world. Maybe it's a level of irrational confidence we're raised with, maybe it's the creativity that's accepted in our culture, or maybe it's harder to define than that. Whatever it is, there's something intangible that's different in a U.S. student than our international counterparts.

A Fool's two cents
I was reminded of this last week when talking to a friend who is teaching elementary school in South Korea. She said that the students are brought up to work extremely hard and value an education from an early age, often going to academies after school to prep for high school entrance exams, but have a hard time with creativity and problem-solving skills. When she gave first- and second-grade students freedom to create an Easter basket from a plethora of supplies, most students made the exact same basket as she had made as an example. In a sixth-grade class trying to teach debate skills by arguing the merits of school uniforms, students couldn't understand benefits or drawbacks that didn't directly relate to them. The focus on learning by rote had become more important that things like creativity and context.

I've experienced this in my own education. In engineering school, there was a large percentage of international students, most of whom scored better on tests than I did. But translating book smarts to the real world was a challenge for many of those students. The smarter they were, the more degrees they had, but the less likely they were able to apply their education to making products or innovations people would actually buy. The teams with the greatest likelihood of success may have included the smartest people in the room, but the team members grounded in reality were just as important to success.

These are experiences I have had, augmented by anecdotes from others, but the tangible evidence is there as well. The industries we think of as dominated by the same foreign companies that are "smarter" than we are actually rely on U.S. innovation to fuel the products they make. Here are three high-profile examples.

The U.S. stopped being the hub of computer manufacturing more than a decade ago. Today, it's more than likely that the computer or other device you're reading this on came from somewhere in Asia, not the United States. But that doesn't mean the U.S. doesn't dominate the ideas and innovations that go into those machines.

Apple (Nasdaq: AAPL  ) , which has come under fire for its outsourcing of manufacturing to Foxconn in China, still packages every product with the key words, "Designed by Apple in California." Those five words describe our innovation advantage better than just about anything else.

Microsoft and Intel (Nasdaq: INTC  ) still form the heart of most PCs, and while they're global players, most of their research centers are domestically based. Intel has nine research centers in the U.S. compared to two in China. Microsoft says that "the bulk of Microsoft researchers work out of the Redmond, Washington, campus." It even mimicked Apple's tag by putting "Hello from Seattle" on the Zune.

Even Samsung, which has risen to power in smartphones and tablets, uses Google's operating system, which was developed in Palo Alto. You could even argue that the physical design of Samsung's phones came from the U.S., since a jury recently found that Samsung copied Apple's designs.

It would actually make more sense in a lot of ways to have products developed closer to where they're manufactured. But for the most part, China, Taiwan, South Korea, and other countries have yet to take the innovation torch (arguably with the exception of Samsung).

Another industry I follow, the solar industry, is dominated by Chinese manufacturers, and even U.S. firms like First Solar (Nasdaq: FSLR  ) and SunPower (Nasdaq: SPWR  ) make most of their panels in Asia. But the ideas behind solar and the technology advancing its development are made right here at their U.S. headquarters.

Bell Labs produced the first solar cells for space use and later produced the first modern silicon solar cell. Today, SunPower and First Solar are researching and advancing solar efficiency in the U.S. and taking the technology to their plants in Asia. Chinese firms are well behind the industry's lead and make modules that are nearly identical.

Advancements in solar are also being pushed by GT Advanced Technologies (Nasdaq: GTAT  ) , a company that manufactures equipment used by Chinese firms to make polysilicon and ingots (the foundation for solar cells). This technology is being put to use in China, but again, the ideas and strategy behind it are coming from the U.S.

Foolish bottom line
Considering the fact that the U.S. isn't the most tax advantageous place to do business, our workers aren't as educated as many countries overseas, and our cost of labor is higher, there must be a reason so many of the world's best companies are based here. The best answer I can find is that we have an innovation gap over the rest of the world, and companies value that more than just cost.

Next time you see a list of the most innovative companies in the world, think about how many of them are U.S. companies. They may not manufacture their products here, they may not sell most of their goods here, but their ideas are truly American. It's not a tangible skill that can easily be tested, but I think there's clear evidence that we lead the world in innovation, and I think that's far more important than simply rating how we score in the classroom.

For more on how American companies stay ahead, check out our detailed reports on three of the companies mentioned here. Our reports highlight how Apple generates its incredible growth, how Intel plans to stay on top, and how First Solar stays ahead of Chinese rivals.

Fool contributor Travis Hoium owns shares of SunPower and manages an account that owns shares of Apple, Intel, and Microsoft. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Apple and Under Armour. Motley Fool newsletter services have recommended buying shares of Google, Intel, Microsoft, Apple, Nike, and Under Armour, as well as creating a synthetic covered call position in Microsoft, a diagonal call position in Nike, and a bear put spread position in Under Armour. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (13) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 28, 2012, at 9:54 PM, neamakri wrote:

    I agree with your article and thank you for it.

    That being said, good math and science allow "innovators" to actually produce goods. Math and science are important basic tools in the "innovators toolbox".

    As an example, yesterday I read an article in Yahoo that Mathematics have been developed to dreate a virtual model of metal alloys. Previously it was a long tedious experiment to find a new alloy for a project ~ by actually creating the metal itself. But with this new math model, numerous alloy components can be tried very quickly inside a computer. This innovation is pure math and science combined.

  • Report this Comment On August 28, 2012, at 10:05 PM, pfxg99 wrote:

    Those studies showing US students trailing in math and science are measuring the average performance of groups of students. But for innovation, you don't need the large group of average students. You need that small number of the smartest, most innovative, most motivated individuals. The US still leads the world in producing these ultra sharp students/inventors, even as the performance of the overall student population declines relative to the rest of the world. This is also the reason behind the growing disparity in wealth distribution.

  • Report this Comment On August 28, 2012, at 11:51 PM, ershler wrote:

    While I agree with the article accurately describes the current relationship between test scores and innovation right now I don't think it it going to last; more design and research is being done overseas everyday.

  • Report this Comment On August 29, 2012, at 7:51 AM, xetn wrote:

    You are confusing Americans with individuals. There are no Americans, only individuals. So, perhaps the real innovators in the US are from India or China or ....?

    The educational system in the US has been in decline for many years and it appears to be getting worse. The percentage of high school students that graduate has been declining and the percentage of college students have been staying in school longer (perhaps because the job market sucks).

  • Report this Comment On August 29, 2012, at 1:42 PM, ScottmFool wrote:

    > uses Google's operating system,

    > which was developed in Palo Alto.


    Mountain View.

  • Report this Comment On August 30, 2012, at 2:20 PM, lagunab1 wrote:

    This sadly self congratulatory article starts with the acceptance that the USA educational system is pathetic. We see a serious US Senate candidate make the claim that women's vaginas have a shut down mechanism and have believers. The only nation with deniers of Climate Change science and evolution is the USA. The embrace of ignorance in this country shows in the test scores.

    Yes, There are tremendous innovations being done in the USA today, primarily in the two science corridors of California and Massachusetts, but not by AMERICANS as in native, but by Americans as in immigrants from places like China and India drawn here to the best universities that take only the best..... Like our wealth distribution, our intellectual distribution is more becoming a two world system. The vast majority on the no very swift side of the equation.

  • Report this Comment On August 31, 2012, at 11:37 AM, mmFuul wrote:

    So how do we profit from this knowledge? What is the take home investment advice ?

    What is the purpose of this article ?

    Don't mean to sound rude but I am not sure if this is the right forum to pontificate these views.

  • Report this Comment On August 31, 2012, at 2:08 PM, aleax wrote:

    @ScottmFool, check : "Android, Inc. was founded in Palo Alto, California, United States in October 2003" (was acquired by Google and moved to Mountain View a couple of years later).

  • Report this Comment On August 31, 2012, at 3:18 PM, ajstudebaker wrote:

    I don't regard the fact that "the world's best companies are based here" as cause for celebration if the only people in the U. S. in those companies are the high level executives, the domestic marketing and sales people, and the people who cut the grass at headquarters.

    In the same vein, I regard the term "American companies" as almost meaningless these days.

  • Report this Comment On September 01, 2012, at 1:17 AM, RadWriter wrote:

    The propaganda surrounding education in the US is extraordinary. As one commenter noted, averages may not be the most appropriate method for determining the adequacy of our educational system. From my perspective, the US system is phenomenally successful in that it is achieving exactly what it was intended to achieve, that is really good skills for kids who win the birth lottery.

    For decades we have been subjected to a tsunami of PR and political BS trying to convince us that money is irrelevant in educational outcomes even as rich kids' suburban public schools generally spend at least twice as much per pupil as poor kids' schools. And the high class prep schools charge parents at least three times as much as the local school board has available.

    The reality is that in almost every case, a quality education costs money, money rich parents are loathe to spend on the kids outside their tight-knit circles who will compete with their kids.

    Another reality no one speaks of is just what ought to be the objective of an "education". Is it to give kids specific job skills, or is it to give kids the ability to reason and think creatively? Is it to prepare kids to smoothly slide into a consumer role or into the role of citizen in a self-governing society? The generally accepted platitudes accept the notion that job skills are all important, and that more kids ought to be able to navigate the flim and the flam of the financial sector.

    But that is at odds with the most successful educational systems outside of Asia. It is also at odds with those consistently successful systems in the US which teach critical thinking, music, art and civics as much as they do the 3 Rs. Yet the constant drumbeat of pontificating about education demands job skills of the most irrelevant and useless varieties for "average kids" in the clear intent to keep them out of the way of the kids from rich parents and preparing them for a future no higher than Walmart or Burger King.

    It is also interesting how industry has completely changed its demands on recent graduates. In the last 35+ years, the provision of on the job training has almost completely disappeared. As corporations have become obsessed with ever higher profit margins and CEO compensation, training and learning have been outsourced to schools to pad the bottom line (and to provide a fat bottom line for those companies looking for fresh opportunities to exploit, especially without having to provide any real services).

    As a result, even high skill positions are no longer nurtured in many high-tech organizations. It is much cheaper to cast aside programmers in languages no longer used than it is to retrain them. H-1B visas provide a steady supply of kids from India, for example, to exploit until they are replaced in turn by the next generation of recent grads from abroad. And almost nothing was spent by the high-tech firm on training.

    If you live in one of the high-tech meccas, you know how many programmers are out of work and how this situation has been building for 20 years.

    If the day ever comes when we are serious about providing a quality education to any and every kid irrespective of the class, income and wealth of their parents, I am sure we can achieve it.

    If Exxon Mobil really wants to make sure we do that, it might start by paying its taxes and stop demanding government subsidies and other indirect hand outs from the taxpayers.

  • Report this Comment On September 03, 2012, at 1:44 AM, Taratora wrote:

    The one area where US leads is the import of well educated and highly skilled professionals and scientists. I don't believe any country in the world attracts so many foreigners to work in it, neither in absolute nor in relative terms. Why this is so is another topic.

  • Report this Comment On September 04, 2012, at 11:32 PM, watain wrote:

    "thought of" in America and "made in" America should go hand in hand. We have a huge workforce available to not only create, but to manufacture and produce most of the goods we need or use. "But their ideas are truly American"? That's pretty weak.

  • Report this Comment On September 06, 2012, at 5:45 AM, thidmark wrote:

    "The embrace of ignorance in this country shows in the test scores."

    And in a great deal of TMF article comments.

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