By Mike Rainone

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The telegraph. The telephone. The incandescent light bulb. The airplane. What do they have in common? All were created or made practical by American inventors. 

Throughout the late nineteenth and early twentieth centuries, America was the undisputed world leader of innovation. Today, we have lost that title. 

For thirteen years in a row, Switzerland has dominated the #1 spot in the World Intellectual Property Organization’s Global Innovation Index. The United States has been bumped back to #3, behind Sweden, with China closing in at #12 in the world.

A Brookings Institute report revealed that since 1973, American innovation, as measured by total factor productivity growth, has dropped by more than half, from an annual rate of 1.9 percent to just 0.7 percent. 

These statistics point to an alarming trend: we are losing our innovative edge. 

Here’s another statistic to consider: an IBM study found that organizations that embrace open innovation had a 59 percent higher rate of revenue growth. Innovation has also been linked to greater economic growth, higher wages, and improvements in both life expectancy and quality of life. 

A decline in innovation is a problem not just for companies, but the country as a whole. To reclaim our position as the global leader of innovation, we first need to understand how and why innovation has changed. 

How Innovation Has Changed

In the past, innovation was largely driven by inventors operating independently. By 2000, per the Harvard Business Review, almost 80 percent of patents went to inventors associated with corporations. Scientific and technological advancements have necessitated a shift to larger teams, so corporations themselves are not the problem. The problem is how corporations approach innovation.

Up until the 1970s, many leading American corporations had dedicated research and innovation centers: 

• AT&T had Bell Labs, which brought together theoreticians, materials scientists, metallurgists, engineers, and even telephone-pole climbers, with fourteen Nobel Prize winners and five Turing Award recipients among its alumni. Resulting innovations included the transistor, information theory, the first practical silicon solar cell, and the laser.
• Xerox had the Palo Alto Research Center (PARC), which developed laser printing, ethernet, the graphical user interface now used on personal computers, and more.
• DuPont had their Central Research Department, which published more articles in the Journal of the American Chemical Society than MIT and Caltech combined in the 1960s and brought us nylon, Teflon, and Kevlar.

Then things changed. In 1996, AT&T spun off Bell Labs. Xerox did the same with PARC in 2002. By 2011, DuPont was no longer publishing any articles, and in 2016 they closed their central R&D lab.

The decline in dedicated innovations teams was matched, unsurprisingly, by a decline in innovation. One study found that Fortune 500 firms won 41 percent of innovation awards in 1971, but only 6 percent in 2006.

A “Just Buy It” Mentality

When it comes to innovation, instead of “Just Do It,” corporations have a “Just Buy It” mentality. Rather than invest in innovation, they wait for the true innovators (typically start-ups) to do the hard work of innovation, and then they sweep in and acquire the company.

There are three reasons for this change, the three things that drive nearly every corporate business decision:

1. Money
2. Time
3. Risk

The way corporations see it, it is less expensive, time-consuming, and risky to buy innovation than drive it.

So why is buying innovation a problem?

Well, first, as soon as a corporation acquires a start-up, what do you think happens to the inventors, the people who brought that innovation to fruition? Those inventors don’t want to be stuck inside of a corporation, subject to the micromanagement and bureaucracy that kills innovation. So they jump ship. The corporation acquires only the static innovative product, not the dynamic innovative thinking behind the product.

Second, innovation is meant to start with a simple question: “What is the problem?” By starting from the problem, you guarantee that the solution will have value. When you instead go out and buy innovation, you’re starting with a solution and have to figure out how to apply it to your problems. Yes, it’s innovation, but it might not be the innovation that is most valuable to your company. It’s the difference between clothing that has been custom-made and tailored to you versus something you buy off the rack in hopes that it fits.

Finally, start-ups are biased toward a certain kind of innovation. According to data from PwC Moneytree, information and communication technologies (ICT) and life-science startups received around 83 percent of all VC investments between 1995 and 2019. If you want to acquire innovation outside of those categories, your options will be much more limited. 

In the short-term, buying innovation seems like less risk, cost, and time, but it comes at the expense of quality.

Reviving American Innovation

Fixing American innovation is simple, though not necessarily easy: companies need to invest in doing innovation, not just buying it. We have to escape the trap of short-term thinking. Instead of looking at the next fiscal quarter, we have to look five, ten, even twenty years into the future. We have to spend money knowing that the return might not come right away.

But the return will come. I’ve been working in innovation my entire life. I’ve seen many changes over the decades, but one thing has always remained the same: innovation is the lifeblood of a company, the most competitive advantage you can have. Yes, innovation costs money, takes time, and is risky. But it’s also worth it.