Innovation drives competitiveness. But what drives innovation?

Posted by Michelle Drew Rodriguez

Research1 shows advanced manufacturing is more essential than ever to economic competitiveness and prosperity. But what is involved in driving, sustaining, and applying the innovation that makes a company or country a leader in advanced manufacturing? In this post, I’ll explore the drivers that make the US a leader in innovation. Research and development (R&D) certainly plays a role, but the real key may be an intangible one: the innovation ecosystem.

The US innovation ecosystem has evolved significantly over the last century, transitioning from business monopolies dominating R&D early last century, assertive government sponsorship mid-century, to the current environment, within a globally connected world, in which small and big businesses collaborate with universities, venture capitalists, and research institutions to drive the innovation ecosystem. Meanwhile, the technological focus of R&D has followed a similar arc, shifting from the creation of physical to digital products, to the more recent formation of new business models that combine the physical and digital worlds to create and capture new forms of value.

With capital, intellectual property, and talent flowing across borders with limited constraints, the United States faces fundamental questions of great importance to the future of its innovation ecosystem: How can it best cultivate the potential of advanced technologies to spur competitiveness? Can the United States continue to lead given the research spend and talent within other nations? No one entity houses all the brightest people or best ideas – the answer lies with looking outside your traditional walls.

Insights from our recent Advanced Technologies Initiative: Manufacturing and Innovation study indicated that, when it comes to tangible factors such as R&D spend, the United States is a clear leader.

  • We spend more on R&D in raw dollars than any other nation.2
  • We account for about one-third of the globe’s R&D spending. In comparison, the next-largest share is China’s, at less than one-quarter of the global total. The other eight in the top 10 barely surpass the US share when all combined.
  • This strong set of R&D capabilities reaches across many industries. In a recent global study3 that assessed R&D leadership in 10 top sectors, the United States was ranked number one for seven of those 10 sectors.

But we may not stay in the lead for long. Other countries are ramping up their spending. Some with far smaller R&D footprints—like Japan and South Korea—already outpace us in two measures of R&D intensity: spend as a percentage of GDP and researchers per million inhabitants.

As the graphic below shows, from 2000 through 2013, South Korea, China, and Taiwan dramatically expanded their R&D intensity in both respects, while the United States made little change over the same period.

And what about the US’s global lead in raw-dollar R&D spending? Experts predict China is on a pace to pass us by 2019.4 China already focuses more of its R&D on commercializing new technologies, while the US focuses a significant core on basic and applied research.5

The “secret sauce” of innovation

R&D spend alone isn’t a defensible advantage for the US. Other countries can—and do—increase their investments. And someday in the not too distant future they may very well surpass us. Does that mean we’ll lose our leadership? No. The enduring strength of US innovation, or of any nation’s capacity to invent, is more complicated than the number of dollars spent on R&D alone.

What matters is the innovation ecosystem–the complex collaboration between private business, government, academia, finance, independent research, and other functions to bring new products and services to market. An effective innovation ecosystem marshals top talent, allows ideas to flow, and lowers barriers to breakthroughs. The US’ entrepreneurial spirit and substantial funding from venture capital firms are huge competitive advantages and key differentiators for the country. It remains the center for “disruptive innovation” thanks to its research infrastructure and low barriers to entrepreneurs and start-ups.

It’s also more resilient with the sum being greater than the individual parts. That’s one of the hidden strengths of what the US brings to the challenge: Key stakeholders within our ecosystem have evolved over time to become less siloed and more collaborative. With the increasing pace of digitalization across the manufacturing industry, its innovation ecosystem has become a more closely connected system with stronger linkages between government, small business, big business, universities, venture capitalists, and research institutions that leverage and benefit from the deeper knowledge and connectivity between each other.

What’s next?

The US innovation ecosystem must continue to evolve to maintain our competitive position. To stay ahead, key players in the ecosystem should regularly analyze our relative position within the global innovation environment, identify challenges, and capitalize on our strengths.

For example, the US is a pioneer in basic and applied research. That’s long been a strength. But spending in these areas has stagnated over the last decade and the government contribution has shrunk as a percentage of the overall federal budget. This puts research performed at government-sponsored institutions at potential risk. Executives indicated that as basic and early applied research takes more time to deliver results in terms of tangible products and technologies, and how/when/where the learnings will be precisely applied aren’t known, it thereby makes it more difficult for shorter term sector specific businesses to nurture it properly. To keep our competitive edge, the government needs to maintain investment levels in the basic and early applied research to ensure a strong foundation for future success. While many other economies across the globe have increased their government R&D support, how should the innovation ecosystem respond? We need to focus on building efficient and effective collaboration and tech transfer mechanisms between basic and applied research as well as through to scale-up commercialization.

The health, adaptability, and success of a nation’s innovation ecosystem ultimately determines its competitiveness. When the ecosystem works, there is a continuous and self-reinforcing cycle in which breakthroughs bring new technologies and products to market, sales and profits increase, and companies invest more in R&D. Our nation’s success hinges on the ability of industry, government, and research labs to work together and engage in ongoing dialogue about creating an environment in the US that continues to promote competitive R&D work and innovations in advanced manufacturing.

1a. Advanced Technologies Initiative: Manufacturing and Innovation, Deloitte and the U.S. Council on Competitiveness.
b. “The future of manufacturing: Opportunities to drive economic growth”, World Economic Forum and Deloitte,, Pages 10 and 11, April 2012.
c. Hausmann and Hidalgo et. al., “The atlas of economic complexity: Mapping paths to prosperity”, Harvard University, Harvard Kennedy School and MIT Media Lab,, 2011.
2“GERD as a percentage of GDP” and “Researchers per million inhabitants (FTE)”, Main science and technology indicators database, OECD,, last accessed on January 2015; “GERD as a percentage of GDP” and “Researchers per million inhabitants (FTE)”, Science, technology and innovation database, UNESCO Institute for Statistics,, last accessed on January 2015.
3“2014 global R&D funding forecast – Researcher perspectives”, Battelle and R&D Magazine,, Page 34, December 2013.
4“China headed to overtake EU, US in science & technology spending, OECD says”, OECD,, November 2014.
5“GERD by source of funds” and “GERD by type of R&D activity”, Science, technology and innovation database, UNESCO Institute for Statistics,, last accessed on January 2015.

2 thoughts on “Innovation drives competitiveness. But what drives innovation?

  1. Thank you for sharing in details. This certainly indicate s that R&D does plays a very important role in innovation

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