Today, much manufacturing has gone to China, many services are going to India, and agriculture is threatening to go to South America. What will the U.S. excel in? Innovation is the frequent response. Indeed, President Obama has issued a clarion call to the nation: “We need to out-innovate, out-educate, and out-build the rest of the world.” But what does “out-innovate” the rest of the world really mean today?
Our recent research suggests that China and India have grown to lead all countries in privately funded new R&D investments, jobs created, and new projects. Moreover, both nations are steadily moving from imitator nations to those with radical innovations of their own. Indian firms have brought out some amazing innovations in the small car, mobile phone service, cataract surgery, and prosthetics areas, to name a few. China has impressed the world with advances in electric car batteries, low cost solar energy panels, bullet trains, stealth aircraft, and space technology, as examples. The decade and century ahead will see even greater innovations from these and other emerging economies. These markets are blessed with huge, growing, restless, and increasingly wealthy populations. Such populations create demand, nurture their own innovators, and stimulate local innovations. Indeed these economies have millions of entrepreneurs. Innovation is no longer the prerogative of developed economies.
In this context, to “out-innovate” the world is urgent but complex. The flight of R&D to emerging markets is driven by low costs, abundant talent, and growing markets. Failure to locate R&D in emerging markets risks the loss of an innovative edge to competitors. On the other hand, location in foreign countries risks leakage of talent, implicit knowledge, and explicit know-how to foreign entrepreneurs. Some countries, such as China, make transfer of know-how a pre-condition for trade and manufacturing.
What can U.S. firms do to best innovate in this changing environment? First, firms should abandon the mantra to locate R&D close to headquarters. Instead, they should locate their R&D in research clusters the world over, where talent and demand are abundant and the environment is conducive. Second, firms should exploit the innovative potential of entrepreneurs in home and foreign nations. Third, firms should build a culture of relentless innovation. Our research indicates that key traits that firms should try to inculcate in their organizations are encouraging innovations to cannibalize current products, embracing risk, and focusing on the future. These traits in turn can be institutionalized by empowering innovators, fostering internal competition, and
