How Obama and Congress Can Revive U.S. Innovation
Earlier this week on ABC News, President Obama defended the government’s $528 million loan to Solyndra, a solar-energy company that later collapsed.
The president argued that “hindsight is always 20/20” and that the program “went through the regular review process and people felt like this was a good bet.”
While it seems unlikely that corruption drove the government’s failed investment, the president’s comments reveal a fundamental misunderstanding of how to spur successful market-driven innovation.
Obama’s primary defense of his solar-investment strategy seems to be that if the Chinese are “pouring hundreds of billions of dollars into this space,” then the United States should, too.
This is exactly the wrong approach. The United States has no particular “comparative advantage” in the field, and we can’t create one by just throwing money at the problem.
A better template for building a world-class, innovation-based industry that can outcompete our rivals in Europe and Asia can be found in America’s world-beating biotech and pharmaceutical industries.
The United States wasn’t born with a comparative advantage in biotechnology. The world’s “pharmacy” started in Europe in the 19th century and was dominated by firms in Germany, France and Switzerland for most of the 20th century.
But starting in the 1970s and 1980s, American policymakers embraced a number of pro-innovation policies that helped create the world’s most attractive investment climate for biomedical innovation.
Strong patent protection, incentives for universities to license promising technologies to industry (through the Bayh-Dole Act), significant research and development tax credits, rapid access to vibrant capital markets, and funding for basic science research through the National Institutes of Health: all helped to turn the United States into the world’s most successful incubator for medical innovations.
From 1971 through 1980, U.S. firms produced about 31 percent of all new drugs coming to market, compared with 55 percent combined from France, Germany, Switzerland and the United Kingdom.
By the first decade of the 21st century, that ratio had flipped, with the United States producing 57 percent of all new medicines and Europe’s “Big Four” producing just 33, according to a recent Milken Institute report.
Unfortunately, America’s biotech edge shows troubling signs of slipping, particularly in the most innovative part of the industry’s “ecosystem” -- small start-up companies that depend on venture-capital funding to develop potentially breakthrough new technologies.
In 2010-11, first-time funding of U.S. start-up companies in the life sciences fell by 50 percent. In 2010, total venture funding fell for the third year in a row, including a 25 percent decline since 2009.
Bruce Booth, a partner at the Atlas Venture fund in Boston, noted that there has been a 27 percent reduction in the number of small, midcap, and large-cap biotech companies (with a value greater than $50 million) in the sector over the last five years.
The causes of the decline in venture capital are many -- tougher drug approval requirements at the Food and Drug Administration that make life-sciences investments riskier bets, more reimbursement hurdles from public and private insurers, and enormous market uncertainty generated by health care reform.
Maintaining America’s edge in the life sciences will require the same far-reaching policy changes that helped energize the industry over the past 40 years. This is where Congress and Obama should be directing their energies.
By creating a stable platform for investment in knowledge-based industries like biotechnology, government can ensure that private investors direct capital to the most promising companies and new technologies, without the need for government handouts that put taxpayers at risk.
This approach also encourages government to focus on what it does best: funding basic research and development work, and creating a better regulatory and investment climate that encourages innovation, whether in biotech or advanced energy research.
That might not result in photo-ops like the ribbon-cutting ceremony that Obama attended at Solyndra, but it’s the best approach for ensuring that the U.S. economy remains globally competitive in the 21st century.
This piece originally appeared in Washington Examiner
This piece originally appeared in Washington Examiner