"The first step in winning the future is encouraging American innovation,"
President Obama declared in his 2011 State of the Union address. He's
right. But what's the pathway to "encouraging American innovation?". An
economic think tank Milken Institute collated some of the best global
innovative ideas. This weekend, lets enlighten ourselves with these
crisis-fighting measures that have seen substatial success over time. How
you like it!
FROM SINGAPORE: A BETTER WAY TO INVEST IN PEOPLE
First, let's look to Singapore, which developed a set of indigenous human
capital strategies that radically altered its economy. In 1960 Singapore
had a per capita GDP of $2,300, roughly equal to Jamaica's. Singapore
focused on becoming a financial services and research hub, while Jamaica
concentrated on tourism. Fifty years later Singapore's per capita GDP was
$43,100, while Jamaica's is slightly above $5,000.
The difference was investment in human capital. Singapore's education
system is heavily subsidized by its Ministry of Education to ensure a
meritocratic principle that identifies and nurtures bright young students
for future leadership positions. In the '60s, Singapore attracted foreign
capital by targeting labor-intensive manufacturing to create jobs. As its
workforce became better educated through its investment strategies in the
'70s, it began attracting higher value-added industries such as
petrochemicals, electronics and data storage. Today, Singapore is a leader
in a host of knowledge-based industries, including the biomedical sciences.
In just the past decade, the number of scientists has leapt from 14,500 to
26,600, a gain of more than 80 percent. In the most recent Global
Competitiveness Report put out by the World Economic Forum, Singapore
ranked 1st in the quality of its math and science education.
FROM CANADA:A BETTER WAY TO TREAT IMMIGRANTS
Best practices in high-skilled immigration policy can be witnessed in
Canada. The government has consistently promoted Canada as a destination
for immigrants and prides itself on having a fairly open and
straightforward immigration process. In 2010, Canada welcomed 280,636
immigrants while the U.S. accepted 1,042,625 -- on a per capita basis less
than one-half of the Canadian figure. Under the Canadian immigration system
there are three categories: economic, family reunification and refugee. The
economic class is based upon a detailed points system that calculates
relevant skills. Canada, with a population one-tenth that of the U.S.,
accepted 186,913 "economic immigrants" in 2010, accounting for 66.7 percent
of its total. These immigrants unquestionably contribute to economic
growth, job creation and increased demand for housing. In contrast, the
U.S. currently caps employment-based visas, including those with
extraordinary skills, professionals holding advanced degrees, skilled
workers and professionals, special immigrants (e.g. religious workers), and
investors, at 140,000, or just 13.4 percent of all immigrants.
Toronto alone absorbs approximately 100,000 immigrants per year, the vast
majority high-skilled (or members of Richard Florida's Creative Class)
under the economic category and has transformed its economy. In addition,
Canada is home to 981,137 temporary foreign residents, the majority of whom
are either foreign workers or foreign students. Temporary foreign residents
can apply for permanent residency in Canada under the "experience class."
FROM FINLAND: A BETTER WAY TO INVEST IN RESEARCH
Innovation, along with entrepreneurship, involves a lengthy process of
research and development, one that inevitably entails risk for firms and
industries. There are three main categories of risk: regulatory, innovation
and monetary. My research and others' shows that lucrative reward systems
and regulatory structures directly influence the level of R&D activities.
Tax credits are one way to effectively reduce the risks inherent in
conducting R&D.
Some readers will be surprised to learn that France has the most generous
tax incentives for R&D among the OECD countries. The government is
continually expanding the scope of the tax credit, and the amount of
funding available nearly doubled between 2006 and 2008. A company can
receive up to 50 percent of its R&D costs the first year; 40 percent is
covered the second and 30 percent in the third. There is a mechanism that
allows funding to be "fast-tracked" for small- and medium-size enterprises,
and in most cases, the waiting period for approval is only three months.
Lastly, the tax credit is either deducted from the annual corporate tax or
reimbursed after three years, providing greater flexibility. The tax
subsidy rate per $1 of R&D in France averages 43 cents, while in the U.S.
it is a paltry 7 cents.
Finland serves as another example of using policy solutions to transform
its economy from resource-based to knowledge-based through consistently
increasing gross expenditure on R&D. Simultaneously it has also pursued
international scientific collaboration, university/industry partnerships,
and enhanced venture capital availability. On a per capita basis, Finland
now claims double the OECD average of patent output.
FROM SWITZERLAND: A BETTER WAY TO THINK ABOUT TAXES
International differences in corporate income tax rates are a key factor
determining where firms locate their corporate headquarters, R&D
activities, and a host of other high-value functions. Today, globalization
forces firms to operate a worldwide network of activities to remain
competitive. Because innovation is mobile across borders, tax policies have
a stronger than ever affect on where innovation assets are placed.
Switzerland's corporate tax rates are among the most attractive in the
OECD. The combined federal and local corporate income tax rate in
Switzerland is 21.2 percent, compared to the U.S. rate of 39.2 percent,
which is the second highest after Japan. Unlike in most countries,
individual Swiss states levy a larger share of corporate taxes and have a
high degree of autonomy in terms of setting their own rates. Between 1998
and 2008, Switzerland attracted 180 regional headquarters of large foreign
firms. In recent years the UK has lost a number of corporate headquarters
to Switzerland. This has been most prevalent in financial services and the
biomedical sectors. It's no accident that Switzerland ranks 1st on the
INSEAD global innovation index.
FROM ISRAEL & GERMANY: BETTER WAYS TO CAPITALIZE SMALL AND MEDIUM
ENTERPRISES
Israel has one of the most active venture capital networks in the world.
While the U.S. might lead the world in venture capital investments in
absolute amounts, Israel has surpassed it relative to the size of its
economy. The Yozma program (started in 1993) is often credited with
initiating the VC industry in Israel. The Yozma program provided tax
incentives for foreign VC investments, and the fund was used to match
investments. This provided a mechanism of due-diligence for the
investments; professional VCs had vetted the firms. Yozma was also used to
invest in existing domestic VC funds to help support the new industry.
The objectives of the Yozma program were to: 1. Establish the critical mass
for a competitive VC industry 2. Learn from foreign partners 3. Create a
network of international contacts
Typically, investments were directed toward high-technology companies in
fields in which Israel already had an advantage or competency. By 2000, the
amount of VC invested in the country had soared.
Looking at policies that nurture small- and medium-size enterprises, an
outstanding example is the German Fraunhofer system. Germany is known for
its mid- to high-technology manufacturing. While the U.S. has witnessed a
decline in manufacturing output as a share of GDP, Germany's has remained
steady. By specializing in medium and high technology manufacturing,
Germany is able support relatively high wages. The Fraunhofer Institutes in
Germany are an important reason for its continued success in manufacturing.
The Institutes support manufacturing SMEs by creating partnerships between
businesses and universities and encouraging industrially-relevant research
in advanced technology areas. The Institutes have a budget of $2.35
billion, with $2 billion of that generated through contract research or
publically financed research projects. There are eighty research centers
with a total staff of 18,000 qualified scientists and engineers. The
expertise and partnerships created through this initiative helped sustain
high technology manufacturing in Germany and resulted in a high level of
market share for SMEs, fueling broad-based export growth.
FROM GREAT BRITAIN: A BETTER WAY TO TURN IDEAS INTO COMPANIES
The United States may be a world leader in technology transfer and
commercialization outcomes, but it could learn something by looking to the
U.K. Universities in the U.K. are among the world's elite in scientific
research. The 2011 QS World University Rankings place the University of
Cambridge first, the University of Oxford fifth, Imperial College London
sixth and University College London seventh. Building upon this strength,
the British government has invested in Engineering and Physical Sciences
Research Councils at three university research centers. Its aim is to
mobilize a collaborative effort between researchers and industry to
commercialize academic R&D, mostly in regenerative medicine and medical
devices. The U.K. launched the Innovation Investment Fund in 2009 to
support promising technology-based businesses, especially in clean tech and
the life sciences. The government hopes to attract capital from the private
sector and eventually create the largest technology fund in Europe, which
could be worth up to $1.6 billion over its 12- to 15-year life.
FROM SOUTH KOREA: A BETTER WAY TO SUPPORT BUSINESS
For an example of creating a business environment that is highly conducive
to innovative activities and making sure they are imbedded in the economy,
look to South Korea. The Korean government was quick to respond during the
recent global financial crisis. The country is highly dependent on exports,
and foreign trade was badly affected by the recession (initially the
economy experienced a 15 percent contraction in real GDP). In response, the
government instituted a number of reforms making it easier to start a
business. It also cut the corporate tax rate. The time required to start a
business was reduced to 7 days in 2010, down from 14 in 2008. The
government created start-biz, an online system where entrepreneurs can sign
up to start a business. Korea moved up to 8th on the World Bank's 2012
Doing Business report, an improvement from 15th place the prior year.
Korea's real GDP growth rate in 2010 was 6.1 percent, the highest in the
OECD.
Like I always say, brickbats and bouquets welcome!
-Sukhi
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