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TheU.S.NationalInnovationSystem:PotentialInsightsforRussia

KennethL.SimonsDepartmentofEconomics

RensselaerPolytechnicInstitute1108thStreet

Troy,NY12180‐3590USA

Tel:(518)276‐3296Fax:(518)276‐2235simonk@rpi.edu

http://www.rpi.edu/~simonk

15November2008(withupdatedreferences,Dec.2009)

PublishedinRussian,inInnovativeDevelopment:InternationalExperienceandRussia'sStrategy,I.Danilin,I.andE.Klochikhin,eds.,Moscow:MGIMO‐University

Press,pp.97‐119.This paper is based on a presentation made at the International Conference onInnovative Development: World Experience and Russia’s Strategy, 23‐24 October2008.Theauthorthanksconferenceparticipantsfortheirdiscussionandforsharingtheir insights about Russia’s situation and potential regarding innovation and theeconomy.

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ThoughtsontheU.S.NationalInnovationSystem:PotentialInsightsforRussia

KennethL.Simons

RensselaerPolytechnicInstitute

Although I am not Russian and do not much know Russia, I may havesomethingtooffertheRussianeconomy.Inthispaper,Idiscusstheimportanceofinnovation to economic growth, point out multiple categories of innovation,describeaspectsoftheUnitedStatesnationalinnovationsystem,andreflectonU.S.innovation policies and practices that might give ideas for Russia. Lengthieranalyses of the U.S. national innovation system include Mowery and Rosenberg(1993) and Simons and Walls (forthcoming), and statistics are available fromNationalScienceBoard(2008).ThediscussionherefocusesonideasforRussia.

EconomicGrowthandTechnologyInnovationisimportantbecauseitdriveseconomicgrowth.Beforeanalyzing

how national innovation systems support innovation, it is therefore useful toanalyzetheroleoftechnologyingrowth.Technologyincludesscience,engineering,and managerial and social practices. Innovation is the novel application oftechnology for practical purposes, including the creation andproduction of goodsandservices.

Themost basicmodel of economic growth says thatwithout technologicalchange,economicoutputstopsgrowing,whereaswith technologicalchangeworldeconomicoutputgrowsforever.1Thisisillustratedinfigure1.Thefigureindicatesthatwithouttechnologicalchangeeconomicgrowthrisestoanasymptote,whereaswithtechnologicalchangeoutputcontinuestorisedrivenbythe improvements intechnology. More substantial models of economic growth account for the role oflabor, population increase, decision making by individuals and organizations,international differences, technology diffusion, and determinants of technological

1 In the model, , and , where Y(t) is economic

outputattimet;K(t)iseconomy‐widecapital(buildings,machinery,infrastructure,etc.)attimet;a(>0)isaconstant;g(≥0)isthegrowthrateoftechnology;α(>0and<1) is the coefficient of capital in the Cobb‐Douglas production function (α<1becauselaboraswellascapitalisassumedtoaffectoutputeventhoughthesupplyof labor is held fixed in this basicmodel); s (>0 and <1) is the fraction of outputsavedratherthanconsumed(thisiscapitalforfutureuse);andδisthedepreciationrateatwhichcapitalwearsout.Phaseportraitanalysis shows that thesolutionofthisdifferentialequationmatchesthepatternsoffigure1.

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increases, but these more substantial models maintain the same conclusion thattechnologicaladvancedrivesadvancesineconomicgrowth.2

[FIGURE1ABOUTHERE]

Ifwestillhadthetechnologyoftheyear1300,economicoutputperperson

could not have grown much by today. What has given us growth? Electricity,powered vehicles, computers,medicine, better fertilizers, better horseshoes,massproduction, telephones... all of the new and improved technologies since 1300.Withoutnewtechnology,theworldeconomywouldstagnate.Inanalysesofasinglecountry’seconomy,thatcountrywouldhavelittletotradewithdevelopednations,andagain itwouldstagnate.Withtechnologicalchange,however, theworldorthecountry grows nearly in proportion to the level of technology. This is whyinnovationisimportant.

Weenhance innovation to enhancegrowth.Alsowe enhance innovation toaddressdangerousworldproblemsthatwouldotherwiseharmourgrowthandourwell‐being:problemslikeenergy,climatechange,andsecurity.Alloftheserequirepartlytechnologicalsolutions.

KindsofInnovationNeededWemust enhance innovation of several kinds. No one kind is enough. To

pointoutthesekindsofinnovation,thissectiondrawsoninsightsfromtheauthor’sandothers’research.Theauthorresearchesthehistoryandlong‐termtechnologicalandcompetitivepatternsthataffectspecificproducts,andhasdonesuchresearchformanydifferentproductsincludingthoselistedinfigure2.Judgingfromhisownandothers’research,thefigureoverviewsthemajorkindsofinnovationthatpropeleconomicgrowth.

[FIGURE2ABOUTHERE]

Innovative ideas come from universities and laboratories, from

entrepreneurs,andfromestablishedbusinesses.Allthesesourcesareimportantindifferent ways. Universities and non‐business laboratories tend to be sources offundamentalresearchideas,drivenmorebythepotentialofnewtechnologiesthanby commercial gain. Entrepreneurs are often sources of major new products ortechnological approaches, since they are the people who build new businessesindependent of established firms and their incentives to earn profit fromestablished products (Jewkes, Sawers, and Stillerman, 1959; Acs and Audretsch,1990).

2 Introductions to this topic include, at themore basic level, Jones (2001), and atmoreadvancedlevelsBarroandSala‐i‐Martin(2004),whichisageneralPhD‐levelintroduction, and Aghion and Howett (1997), which focuses on models in whichtechnologicalchangeisendogenous.

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These sources lead to products, such as listed in figure 2. Some productsreplaceexistingproducts: automobiles replaced carriages,ballpointpens replacedfountainpens.Otherproductshavenewusesas for theantibioticpenicillinor forinformation technology (IT) consultancy. New products typically require years ofdevelopmentinvolvingmanypeopleandcompanies.

Onceaproducthasbeencreated,itisusuallyofpoorqualityanddifficulttoproduce.Hugenumbersoftinyinnovationsareneededtoimproveboththeproductand how it is produced.Without these innovations, the productwould have littleuse. Therefore, follow‐on innovation is also crucial to society, and crucial to thecompaniesmakingtheproductsincenon‐innovativefirmswouldlosetheirsalestocompetitors.

An example is the television receivermanufacturing industry (Klepper andSimons, 1997, 2000). Many entrepreneurs and companies helped to developtelevision,fromthe1920stothe1940s.AfterWorldWarII,productionoftelevisionsets increased. The first setswere expensive luxury goods. They broke every fewweeks.Ifyoumovedatelevision,anengineerhadtocomeandre‐tuneit.

Hundreds of companies began making televisions. Figure 3 shows thenumberofcompaniesthatmadetelevisionseachyearintheUnitedStates.Topointout that similar patterns happened in many countries, the figure also shows thenumber of companies in the United Kingdom. Many entrepreneurs plus existingfirms started building and improving television receivers. Some did not innovatefast enough. Their production cost soon exceeded their sales price, or theirtelevision sets became relatively poor in quality. These companies or theircustomers therefore gaveupon these televisions; such firmsexited the televisionreceivermanufacturingbusiness.

[FIGURE3ABOUTHERE]

The number of firms eventually stopped going up,when entry became too

muchofaninnovativehurdle.Thenumberoffirmsdecreasedintothe1990s.Many,butnotall,productsarelikethis:theyhavea“shakeout”inthenumberofproducersbecauseofongoinginnovation.

Fortelevisions,Japanesefirms,otherAsianfirms,andPhilipsmadethebestsetsinthecheapestmanner.Japanesefirmsremained2‐3generationsaheadofU.S.andBritishfirmsintheuseof integratedcircuits. Japanesesetsbroke3timeslessoften than American and British sets. These Japanese and other foreign firmseventually acquired or put out of business all of the U.S. and British firms. Thedashedlinesleaveoutthenewsubsidiariesofforeignfirms.Youcanseethedashedlinesgoingtowardzero.EventuallyalloftheU.S.andBritishfirmshadgoneoutofbusiness or been acquired. They had been very innovative, but not innovativeenough.

Table 1 presents some of their process innovations, which this authorcataloguedbyreadingallrelevantindustryarticles.Thereweremanymoreproductinnovations,buttheyarenotlistedhere,asthisismerelytheinitialpartofalongerlist. Most of the innovations are very minor improvements to manufacturing. Intotal,however,theyaddeduptomassivechange.

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[TABLE1ABOUTHERE]

Firmsthat introducedtheseinnovationsweremanytimesless likelytoexit

overthenextfiveyearsthanfirmsthatdidnot innovate.Theinnovatorssurvived,andthebestofthemgrew.Bigradioreceiverproducers,withtheirproductionlineexperience,survivedlongestandgrewthemost.

Hence an economy must not only pioneer new products. It must alsoinnovateordieinthebusinessofproducingthoseproducts.

TheU.S.NationalInnovationSystemNext,considerthenationalinnovationsystemthatsupportsinnovationinan

economy,inparticular,theeconomyoftheUnitedStates.Thissectiondrawsheavilyon Simons and Walls (forthcoming). An older but still revealing analysis of theUnitedStatesinnovationsystemisMoweryandRosenberg(1993).

TrendsinR&DActivitybyTypeandbyPerformingSectorBothinnovationandalsoresearchanddevelopment(R&D)havegrownfairly

steadily in theU.S., as table 2 shows forR&D from1953 to 2006. Basic research,applied research, and development have all grown. Basic research grew by amultiple of 21 over this 53‐year interval, and applied research and developmentresearcheachgrewbyamultipleof9.

Bythe1950s,industrywasthelargestsectorinwhichR&Dwasperformed.In fact, as table 3 shows, industry R&Dhas far exceededR&D in universities andcolleges,governmentlabs,andnonprofitorganizations.Governmentfundedmostofthe R&D in universities, and some of the R&D in non‐profit organizations. TheindustryR&D, in contrast,was funded almost entirely by industry itself (NationalScienceBoard,2008).

ReasonsforSuccessfulInnovationintheU.S.,andIdeasforRussiaFourkeytraitshavebeen important forU.S. innovation: incentives,societal

institutions, a mix of entrepreneurial and large‐firm capitalism, and governmentsupport. Incentives are crucial because they determine individuals’ and business’willingnesstoinnovate.Inorderforindividualsandbusinessestoinnovate,andforinvestors to pay the cost of that innovation, they must be able to capture asubstantial portion of the monetary returns to invention. This requires a well‐functioningbusinessenvironment,inwhichpropertyrightsandlegalprocessesthataffectbusinessesworkeffectively.

Although patents and copyrights are usually thought of as providing theseincentives, inpractice they typicallyprovide limitedprotection,and inmanywayslimitedprotectionisbest.3TheU.S.SupremeCourtin2006and2007madeseveral3Patentstendtobehardtodefendincourt,andcompetitorsoften“inventaround”existing patents to achieve the same purpose by different methods. Indeed,companies tend to acquire large number of patents and to form agreementswithother companies in an industry to trade the rights to use these large numbers of

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decisions that tend to reduce the breadth of patent claims, make it harder forrelatively obvious inventions to be patented and defended in court, and weakenpatentholders’ rights, effectively responding tomounting evidence that toomuchgrantingofrelativelyobviouspatentswastendingtostifleinnovationandwastetoomuchmoneyoncourtcases(JaffeandLerner,2004,detailsuchconcernsregardingimproperfunctioningofthepatentsystem).

R&D tax credits are another incentive used to spur innovation. Such taxcredits reward companies for doing R&D by reducing taxes they owe to thegovernment. Nations offer competing R&D tax credit policies to try to attractresearch‐intensivefirmstotheirnations,andwithintheU.S.states,differentstateshavesimilarlyofferedalternativeR&Dtaxcreditpolicies(Wilson,2009).

Societal institutions to encourage innovation include legal, social, andinfrastructure systems that function reasonably. These societal institutions arelargelytakenforgrantedintheUnitedStatesandreceiverelativelylittlein‐countryresearch. Incontrast,RussiancitizenswithwhomtheauthorspokesuggestedthatlegalinstitutionstodefendpropertyrightsareinparticularneedofimprovementinRussia. Investmentinroads(andnodoubtothertypesof infrastructurethataffectbusinessactivity)inmanyregionsmayalsobeimportantforRussia.

Legal and social institutionsmustmake it easy forbusinesses to formandchange,ratherthanhinderingbusinessformationandchange(WorldBank,2008).Again, these issuesare largely taken forgranted in theUnitedStates.Settingupabusiness needs to be as rapid and simple as possible in order to encourage theformationonentrepreneurialbusinesses that spur innovation.Businessesneed tobeable tochange theirpoolofemployeesand thekindsofproducts theydevelopand produce, as easily as possible (although allowing for individual nations todevelop theirownpriorities andmeansof socialprotections), inorder tomake itpractical for existing businesses to innovate. Graft in bureaucratic approvalprocesses, in contrast, stymies business formation and change by making themexpensive and time consuming, and thereby stymies innovation needed to fueleconomic growth. Business closuremust also be easy. Entrepreneurswho start abusinessusuallyfail,andwithoutbankruptcy lawsandareasonableruleof lawtoprotectthemagainstpeopletowhomtheyowedebt,individualsmightbeunwillingtotakeontheriskofstartingabusiness.

Legal and social institutions also affect the provision of financing for newprojects by existing firms and new businesses. Financial institutions that helpinvestorsatearlystages,suchasso‐calledangelinvestors(wealthyindividualswhoprovidefundsinexchangeforashareintherightstoanewfirmanditshoped‐forfutureprofits),areparticularlyimportantastheygreatlyexpandtheamountofnewbusinessactivityforriskyprojectsthatrequireR&Dinvestments.IntheU.S.,manytypes of funding sources, not just banks, provide funding. Figure 4 indicates thepatents,sothatitisthewholegroupofpatents,notanyoneeasily‐defensiblepatent,that is used to defend a company’s profits. Moreover, profits are far more oftendefended by other means including innovative lead time, steady decreases inproductioncost,secrecy,andsalesandservicenetworks(Levinetal.,1987,pp.794‐795).

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mostmajorcategoriesof fundingsources in2007.The individualsandbusinessesprovidingfundsknowthatbusinesseshaveachancetoearnmoney,andknowthatthey have appropriate legal protections to be able to obtain their due share ofprofitsamongsuccessfulbusinesses;otherwisetheywouldnotinvest.Soinadditionto having the right to lendmoney, investors need to know that bureaucracy andotherproblemswillnotimpedebusiness.

The mix of entrepreneurial and large‐firm capitalism in the United Statesencouragesinnovationofdifferenttypes(Baumol,Litan,andSchramm,2007).BothentrepreneursandestablishedfirmshavebeensourcesofnewproductsintheU.S.,withperhapsagreatertendencyforentrepreneurstoconsidernovelapproachestoinnovation.4 Established firms, however, are by far the dominant source ofincremental improvementstoexistingproductsandtheirproductionprocesses,aswasshownintherightpaneloffigure2.Boththesetypesofinnovationareessentialtoeconomicgrowthand to thecompetitivenessofanation’s firmswithinaglobaleconomy. Althoughmost U.S. government R&D awards to industry tend to go tolargeestablishedbusinesses,thegovernment’sSmallBusinessInnovationResearchprogram reserves 2.5% of large (over $100 million) external R&D budgets forawardstosmallbusinesses.

Government support for innovation is important because innovation is apublicgood.That is, thepublic (society‐wide)gains from innovationare less thantheprivatefinancialgainstotheinnovator,causinglessinnovationtooccurthanissociallyoptimal.Thisisevenmoretrueforappliedresearchandespeciallyforbasicresearch. The potential gains from appropriate government support fordevelopment,appliedresearch,andbasicresearcharethereforeenormous.Thishasbeen a key rationale for U.S. government support of R&D, which in 2006 totaled28%ofoverallU.S.R&Dexpenditures.

Gainsfromgovernmentsupportmaybeevenmoreimportantinthecontextof international industry competition, because government‐funded R&D can notonly benefit society at large but also help a nation’s businesses to develop viableproducts that are competitive internationally ‐‐ that is, thathave sufficientlygoodproduct quality and features and sufficiently low production cost that firms canremainprofitabledespite any international competitors. This canhelp indigenousindustry develop, with both employment benefits and the stimulus of otherbusinesses(includingsuppliers,downstreambusinesses,andspun‐outbusinesses)inthesamegeographicregion.IntheU.S.,thisrationaleisalsosometimesdiscussedregardingsomegovernment‐fundedR&D,andforexamplehelpingtomaintainU.S.economic competitiveness is one of the aims in research supported by the U.S.DepartmentofEnergy.

4Someanalystshavearguedthatentrepreneursaremoreactivethannewfirmsingenerating new products, but a careful comparison of their relative rates of newproductcreationremains for futureresearch. Inanycase,previousstudiesof theimportanceofentrepreneursandsmallbusinessestonewproductcreationhaveinfactshownthatmany(perhapsamajorityof)newproductsderivefromestablishedbusinesses(Jewkes,Sawers,andStillerman,1959;AcsandAudretsch,1990).

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However, government support can easily become wasted money. R&Dawards by U.S. government agencies nearly always require a competitiveapplicationprocess,sothatawardstendtobemadetoorganizationsandindividualresearcherswith a record of reliability and quality andwithwell‐developedR&Dplans that prove convincing to reviewpanels of independent experts. In contrast,some of the Russians with whom the author spoke suggested that Russiangovernment R&D funds are often allocated as personal favors from one largegovernmentorganization to another,with little oversight, little effect of pastR&Dsuccess (not to mention commercialization success) on future ability to obtainfunding, and little in thewayof competitiveallocationprocedures.While sensiblereasonsforsomeoftheseproceduresmightexist,moreeffectiveproceduresseemtobe crucial ifRussian governmentR&D investments are to yield successfulR&Doutcomesthatleadtoactualcommercializationofproductsthatarecompetitiveontheworldmarket(andwhoseaveragebenefitsexceedthecostsinvested).

U.S.InnovationPolicyConcerns,andIdeasforRussiaRecentdiscussions intheU.S.reflectadditional innovationpolicyproblems.

Theseproblemsoccur inmanynationsworldwide.Hencediscussionof themmayprovidegeneralideasforeffectiveinnovationpolicy.

TheBayh‐DoleActof1980allowedU.S.universities toobtainpatents fromU.S. government‐funded research. This increased commercial licensing fromuniversities, although few universities have profited substantially ‐‐ mostuniversities’technologytransferofficeslosemoneygiventherarityofpatentswithhighprofits.TheActalsoencourageduniversitiestoemphasizemoreappliedratherthan basic research (or among basic research programs to emphasize activitieslikely to yield commercial benefits). Whether this shift is beneficial has beencontroversial and remains unclear, although other government grants touniversitieshaveincreasinglyemphasizedtechnologytransfertoindustry.Arelatedconcernisthatuniversityresearchershavebecomemoresecretive,becauseoftheneed to avoid disclosure of R&D results that might be patented, reducinginterchange of ideas that is important to stimulate innovation (Lester and Piore,2004).

Allocation of government R&D funds across areas has sometimes beencontroversial. Controversies include whether government should provide anysupport for private corporate R&D efforts,5 how much military R&D findingscontribute to thegenerationofcivilianproductsandhowtoencourage thiscross‐over,andhowmuchtheU.S.governmentshouldfundresearchinthesocialsciences.Social science R&D made up only 2.2% of U.S. government R&D expenditureobligations in 2007 (National Science Board, 2008, vol. 2, p. A4‐55). Yet frequent5Asmallprogram,theAdvancedTechnologyProgram,hasprovidedpartialsupportforselectedhigh‐riskhigh‐technologyprojects(theprogramwasreplacedwiththerelatedTechnology InnovationProgram in2007). Theprogram is small in that itreceived for example only $79million in (fiscal year) 2006, compared to $81,160millionoffederallysupportedR&Din(calendaryear)2006(NationalScienceBoard,2008,vol.1,p.4‐61,vol.2,p.A4‐10).

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policy unknowns and failures suggest a need for a dramatic rise in funding ofserioussocialscienceinordertobetterascertainpoliciesthatwillachieveintendedgoals,yieldingpotentiallyenormousbenefitsfortheeconomy,individualwell‐being,and theoperationof businesses andotherorganizations.Thebulkof governmentR&Disformedicalsciences(lifesciencespluspsychology),whichtogetherin2007made up 54.0% of R&D expenditure obligations. Energy‐related R&D funding isgrowingandnodoubtwill continue togrow.AmongotherR&Dareas, there is anapparent need for growth in R&D related to climate change, climate engineering,andthemitigationofclimateimpacts.

ImmigrationofskilledindividualshasbeenamajorcontributortosuccessfulR&DandinnovationintheU.S.(RoyandLerner,1984).Along‐termdeclineintheaverageskillofimmigrantstotheU.S.,relativetopersonsbornintheU.S.,hasledtoconcerns that theU.S. is failing to realizemanyof the economic gains that earlierskilled immigrants provided (Borjas, 1999). Indeed, after the Al‐Qaeda attacks ofSeptember11,2001,itbecamemuchmoredifficultforapplicantsincludingforeigngraduatestudentsandresearcherstoobtainentryintotheU.S.Notlongafterward,the number of temporary work visas (H1‐B visas) fell from 195,000 in 2003 to65,000in2004whentheU.S.governmentallowedlegislationsupportingthelargernumber of visa to expire. The net effect of these policies has been to make allimmigrationdifficult,althoughtheeffectmaybegreatestforskilledimmigrantswhogenerallyenterthecountrylegally(asopposedtoillicitlycrossingnationalborders).Incontrast,theU.S.couldreadilyattractandretainmanymoreofthehighest‐skilledworkers simply by streamlining immigration procedures for these people and bygrantingwork visas to their familymembers. Russia has recently suffered fromabraindrain as someof itsmost skilled scientists, engineers, and innovatorsmoveabroadtoseekbettereconomicandsocietalconditions.Regardlessofsuchabraindrain, immigration policies to attract skilled businesspeople, engineers, andscientists can benefit Russia (thoughbenefits are likely to be illusory unless suchimmigrantshaveeconomicopportunitiesinRussia).

The educational level in the U.S. relative to other nations is an ongoingconcern. Although literacy is high, average mathematics and science levels lagbehindlevelsinotheradvancednations.Inoneinternationallycomparablesurvey,theProgram for InternationalStudentAssessment’s2003 testof fifteen‐year‐olds,U.S. students scored almost the lowest among industrialized nations onmathematics questions, and well below median on science questions. A similarstudyoffourth‐andeighth‐gradestudents,theTrendsinInternationalMathematicsandScienceStudy, yieldedhigherbut still unimpressive rankingsofU.S. students’learningrelativetotheircounterpartsinothernations.(SeeNationalScienceBoard,2006, vol. 1, pp. 1‐20 to 1‐23.) Efforts to improve education in U.S. schools haverarelysucceeded.One idea thatmightwork,basedoncomparisonofnationswithvaryingskillsattainmentinschools, istoenhanceteacherqualitythroughahighlyselective program of teacher certification, with only highly capable universitygraduates(havinganydegreenotjustateachingdegree)beingabletoachievethehonorofselectionforcertification(Economist,2007).

TherelativelyflatnumberofU.S.graduatesinscienceandengineering,atatime when other nations’ output of scientists and engineers, has also triggered

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alarmamongscienceandengineeringprofessionalsandpolicymakers in theU.S.6Some recent efforts aim to encourage a greater number of youths to pursueuniversity educations in science and engineering. However, more carefulassessment is needed of the potential demand for scientists and engineers ofdifferent types and quality levels, aswell as ofwhether increased supply of suchpersonnelwillcreatenewbusinessesthatgenerateproportionalnewdemand,andoftheextenttowhichscientificandengineeringskillsarebeneficialforjobsthatdonot directly involve science and engineering work. Also, other skills besidesmathematics, science, and engineering may be most important, and an emphasispurelyonimprovingmathematicsandscienceskills,orongeneratingmorescienceand engineering graduates, risks ignoring and potentially harming aspects ofeducationthatmightbemostimportant.Oneideahasbeentoenhancetheskillsofstudentsregardingentrepreneurshipandinnovation.

InnovationpolicycampaignshavelongsoughttoinfluencedecisionsmadeintheU.S.capitol.Themostrecentmajorinitiative,inwhichthisauthorparticipated,istheNational Innovation Initiative.Theprogrambrought togetherpeople from thepolicy‐making, business, science and engineering, and innovation researchcommunities.Thisprogramhelpedtostimulatethepassagein2007oftheAmericaCOMPETESAct.TheActaimedtodoublegovernmentfunds,overtenyears,forR&Dat government agencies including theNational Science Foundation, reinstateR&Dtaxcredits,enhancepre‐collegeeducationinmathandscience,enhanceworkforcetraining,andenactimmigrationpoliciesthatretainmorehigh‐skillforeignworkersintheU.S.However,thiswasenabling legislationthatallowedbutdidnotprovidefunding. The U.S. government budget approved December 2007 provided only aminor fraction of the intended funds for the initiative. A systematic reform andfunding of innovation policy remains under consideration as Barack Obama’spresidentialtransitionteampreparesforthenextpresidentialadministration.

Data on international output of patents and articles show that the U.S.continuesitsstrongR&Doutput,butthatotherworldregions‐‐particularlyAsianrimnations ‐‐haverecentlybeenexpanding theirR&Doutputmuchmorerapidlythan the U.S. The U.S. share of English‐language science and engineering articlesworldwide,forexample,fellfrom34.2%in1995to28.9%in2005(NationalScienceBoard,2008, vol. 1, p. 5‐38).The trend seems tobemorepronouncedwhennon‐English languagearticlesareconsidered.ThishascreateduncertaintieswithintheU.S.aboutthenation’s future,sothatsomeobserversaskevenwhethertheU.S. islikely to retaina leading role ingeneratingR&Dand inglobally competitivehigh‐technology industries, with serious potential ramifications for the U.S. economy.There isaclearneed,despite theU.S.’spast innovationsuccess, tostrengthenU.S.innovationpolicy.

6 For data on science and engineering graduates in the U.S. by discipline, type ofperson, and level of education, and comparison to trends in other nations, seeNationalScienceBoard(2008,vol.1,chapter2).

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Conclusion This paper has outlined the central importance of innovation in economicgrowth. It has pointed out that multiple parts of the economy and types ofinnovation are crucial for effective economic growth. And it has described keyaspects of the U.S. national innovation system. In doing so, the paper has soughtpotentiallyusefulapproaches toaid innovation inRussia.Hopefullysomeof thesepolicyideaswillnotbetoonaïveinthecontextofRussia. To enhance innovation in Russia, a key need is to decrease bureaucracyaffectingbusinesses,allowingeasierbusinessformation,change,andclosure.Graftand corruption affecting businesses, business innovation, and innovation moregenerally,shouldbesystematicallyaddressedthroughincentives,fundingmeasures,and lawsand judicial systems that reduce thegraftandcorruption.Legal systemssupporting property rights and personal and business protections should bestrengthened.Flexibilitymustbegiven to scientists, engineers, andentrepreneursto pursue the R&D approaches that seem to them most effective, and tocommercializeproductsinwaysthatseemmosteffective.Thenationshouldacttoretain and attract skilled individuals by creating in‐country opportunities forscientists, engineers, and entrepreneurs, and by making skilled immigrationattractive. The nation should continue strong governmentR&D funding, includingserious funding for serious social science research, and it should do so throughgrantallocationandfollow‐upproceduresthatensurethefundsarenotwasted.Thenationshould invest in strongeducationnotonly inmathandscience,butalso inotherskillsthatsupportinnovationandcommercialization.

Interacting policies such as these can propel the future Russian economy,allowing Russia to maintain a strong role among the world’s innovative nations.Russia has a history of fine accomplishments in mathematics, science, andengineering. There is every reason to expect that Russia can continue theseaccomplishmentsinfuture,inaburgeoningeconomy,butonlyifRussiasucceedsatthehardtaskofreformingitssocietalandeconomicsystemstosupporttheforcesthatdriveinnovation.

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Jaffe,AdamB.,andJoshLerner.2004.InnovationanditsDiscontents:HowourBrokenPatent System is Endangering Innovation and Progress, andWhat toDoAbout It.Princeton,NJ:PrincetonUniversityPress.

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Figure1.Economicgrowthpathsimpliedbyabasicmodelofeconomicgrowth,withandwithouttechnologicalchange.

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Figure2.Typesofinnovationneeded,anditssources.

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Figure3.NumberoftelevisionreceivermanufacturersintheUnitedStatesandtheUnited Kingdom, 1930s to 1990s. Source: Data compiled by the author fromsuccessive editions of Television Factbook and Kelly’s Directory of Merchants,ManufacturersandShippers.Copyright©2008byKennethL.Simons;reproducedbypermission.

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Figure4.FundingsourcesfornewcapitalcommitmentsintheUnitedStates.Source:SimonsandWalls(forthcoming).

PrivatePartnerships

InvestmentBanks

FundofFundsandSec.OtherFinancial

Institutions

Corporate(VentureCapital)

AdvisorsNonFOF

Other

Other

17

Table1.InitialentriesinalistofprocessinnovationsintheU.S.televisionreceivermanufacturingindustry.Year Producer(s) Innovation Impact1947 RCA,Philco assemblylineswithconveyorbelts 71947 RCA trunnionsupportsinvertedchassis

forworkingpositions4

1947 RCA,Emerson automaticsocketrivetingtochassis 31947 RCA,Emerson useofair‐gunnutrunnersand

screwdrivers3

1947 RCA useofoperationsheetsatassemblystations

2

1947 RCA overheadconveyersforchassisandmaterials

4

1947 RCA,Emerson testing:setupsfori‐f,r‐f,anddeflectiontests

5

1947 RCA,Philco centraltestsignalsource 41947 RCA coilwindingmachine(with

automaticindexing,compression,setofmoldingcompound,cooling,andcutting)

3

1948 TelequipRadio monitoringscope 11948 Philco establishmentofincomingparts

inspectionandstatisticalqualitycontrol

3

1948 Philco,Emerson pass‐alongassemblylinewithrollingcradlesintracks

4

1948 Emerson plywoodjigformastercableassembly

1

1948 Emerson rollerskidsforchassis,withballbearingrollers

1

1948 Emerson mirrorallowsoperatortomakeadjustmentsatrearwhileviewingscreen

2

1948 Philco punchpressesforchassis 31948 Philco nailboardsforcheckingpunch

presses2

1948 Philco oilcoatingofchassisframesbeforepunching

2

1948 Philco electro‐platingofchassisframes 3Source:Datacompiledbytheauthor(seeKlepperandSimons,1997).Subjectiveimpactratingsarefrom1(lowest)to7(highest).Copyright©1995byKennethL.Simons;reproducedbypermission.

18

Table2.Basicresearch,appliedresearch,anddevelopmentexpendituresintheUnitedStates,1953‐2006,millionsofconstant2000dollars.

Year Basic Applied Development Year Basic Applied Development1953 2,519 7,065 18,699 1980 16,181 25,377 75,4311954 2,761 7,482 20,274 1981 16,336 27,621 78,3251955 3,089 8,074 22,347 1982 16,980 29,044 82,7091956 3,702 9,938 30,186 1983 18,219 31,129 88,5971957 4,060 12,044 33,341 1984 19,705 33,184 98,2351958 4,603 13,455 35,191 1985 21,155 36,435 106,8961959 5,238 14,165 40,783 1986 24,075 38,231 106,4641960 6,112 14,567 44,485 1987 25,249 38,186 109,1981961 7,104 14,678 46,667 1988 26,140 39,009 111,7221962 8,457 17,144 46,897 1989 27,864 41,087 111,6671963 9,704 17,730 52,943 1990 28,223 42,769 115,2921964 10,827 18,983 56,511 1991 32,139 45,746 112,6241965 11,822 19,408 58,643 1992 31,955 43,912 115,5411966 12,642 20,074 62,517 1993 32,520 42,182 112,8131967 13,257 20,290 64,165 1994 32,849 40,567 114,0461968 13,551 20,620 64,839 1995 32,146 44,440 122,7681969 13,350 20,859 65,207 1996 34,946 45,992 129,3251970 13,053 20,893 61,472 1997 38,690 48,789 134,8611971 12,868 20,176 60,181 1998 36,624 48,084 150,0291972 12,763 20,377 62,134 1999 39,718 53,231 157,4251973 12,872 20,897 63,415 2000 42,763 56,931 167,8621974 12,989 21,149 61,927 2001 46,666 63,190 161,3731975 12,828 21,292 59,750 2002 49,335 48,982 167,1581976 13,367 22,331 62,406 2003 51,793 57,750 162,0881977 14,054 22,601 64,717 2004 51,788 64,055 158,3681978 15,208 23,394 67,872 2005 52,943 63,162 170,4401979 15,816 24,415 71,538 2006 52,994 64,308 175,952

Source:NationalScienceBoard(2008,volume2,pp.A4‐13and14,A4‐21and22,andA4‐29and30).Seenotesinsource.

19

Table3.R&DperformingsectorsintheUnitedStates,1953‐2006,millionsofconstant2000dollars.

YearU.S.

Government IndustryUniversity&College

OtherNonprofit Year

U.S.Government Industry

University&College

OtherNonprofit

1953 5,563 19,896 1,494 611 1980 14,490 79,989 11,944 3,0691954 5,226 22,098 1,634 665 1981 14,555 85,294 11,984 3,0181955 5,189 24,096 1,824 699 1982 15,147 91,137 12,120 3,0531956 5,829 32,339 2,016 750 1983 16,608 97,663 12,654 3,3361957 6,474 36,550 2,161 831 1984 17,612 107,990 13,530 3,7121958 7,350 39,349 2,395 951 1985 18,781 118,162 14,785 3,9601959 8,101 44,335 2,824 1,125 1986 18,954 120,607 16,197 4,0241960 8,558 47,679 3,348 1,255 1987 18,565 123,176 17,497 4,1171961 9,340 48,657 3,917 1,429 1988 18,948 125,364 18,786 4,2441962 10,143 51,174 4,602 1,683 1989 19,388 127,117 19,899 4,6701963 11,738 56,047 5,405 1,872 1990 19,207 131,638 20,757 5,0571964 13,399 58,964 6,211 1,884 1991 18,059 135,801 21,556 5,5091965 14,006 61,293 7,076 2,095 1992 18,352 135,159 22,440 5,7801966 14,272 65,553 7,844 2,315 1993 18,704 130,612 23,184 5,9601967 14,416 66,821 8,517 2,348 1994 18,120 130,062 23,932 6,2031968 14,037 68,293 8,779 2,392 1995 18,352 140,957 24,548 6,3261969 14,495 68,241 8,719 2,453 1996 17,671 151,696 25,262 6,6161970 15,087 63,903 8,781 2,457 1997 17,628 162,880 26,070 6,9451971 15,250 61,670 8,872 2,451 1998 17,997 173,213 27,126 7,6101972 15,500 62,999 9,140 2,554 1999 18,240 186,056 28,776 8,4291973 15,186 65,008 9,272 2,769 2000 17,917 199,961 30,688 9,7821974 14,780 64,042 9,260 2,845 2001 19,948 197,284 32,933 10,8721975 14,635 61,735 9,393 2,793 2002 20,635 186,077 35,696 11,8521976 14,653 64,948 9,699 2,833 2003 21,383 188,644 38,022 12,0661977 14,529 67,514 10,166 2,838 2004 21,059 190,357 39,378 11,7321978 15,216 70,420 10,918 2,958 2005 21,948 200,609 40,048 12,2621979 15,079 74,801 11,533 3,157 2006 21,025 208,576 40,178 12,294

Source:NationalScienceBoard(2008,volume2,pp.A4‐5and6).Seenotesinsource.