It is very difficult to measure the full significance of "displacement" innovations in the United States, because such displacement is a domestic give and take. But if we look at the international picture, we can get a better feeling for the significance of these kinds of innovations. We chose as an example the yarns and fabrics industry and we compared synthetics with cotton and wool. CHART 6 INNOVATION AND INTERNATIONAL TRADE An Example: U.S. Exports of Yarns & Fabrics Synthetics (High Technology) EXPORTS 1956 $187 Million $158 Million Source: U.S. Department of Commerce. EXPORTS 1965 INTRODUCTION and settinG 7 We can see in Chart 6 that synthetics, which sprang from considerable innovative effort, have maintained our share of the international yarns and fabrics market. The total exports of cotton and wool yarns and fabrics have declined by about a third over the period 1956-1965, whereas the total exports of synthetic yarns and fabrics have increased by over 50%. The export of high-technology synthetic yarns and fabrics has therefore maintained the U.S. export of yarns and fabrics roughly at the level it was in 1956. We could give other examples of the secondary effects of innovation. We are satisfied that the international stature of a nation with respect to trade— and, it is important to note, assistance to under-developed countries-becomes increasingly dependent upon its innovative performance. INNOVATION AND COMPETITION There are other reasons why the Federal Government should be interested in promoting invention and innovation, among which is the close and complementary interaction between innovation and competition. Competition has traditionally involved rivalry among manufacturers of like products, as well as the stimulating effect of innovators who introduce new products and reduce costs through new methods of production and distribution. For example, the advent of the airplane had a powerful influence on competition in public transportation, and the automobile brought entirely new forces into the private transportation sector. To take more recent examples, the introduction of the transistor and integrated circuits has stimulated competition in the electronics industry. The influence of innovation on competition has become stronger and clearer with the accelerated pace of technological change. Competition has developed between entirely new types of products that perform old functions better or make possible entirely new functions. To give just three examples, consider electrostatic copying ("xerography"), synthetic wash and wear fabrics, and instant photography. The importance of innovation has become so strong that no longer may we look only to the conventional limits of a given industry to examine competition. Increasingly, innovations of importance are coming from companies that do not fit within the conventional classifications of individual industries. For example, synthetic fibers came from the chemical industry, not the textile industry. High-speed ground transportation is now as much the domain of the aerospace and electrical manufacturing industries as it is that of the automotive and railroad industries. Instant photography (the Polaroid camera) was not developed by the photographic industry. And electrostatic copying came from outside the conventional office equipment industry. It is easy to see, therefore, that innovation from the outside (across conventional industry boundaries) is a powerful force influencing competition. Consequently, a climate conducive to technological progress is important not only with respect to economic growth and international stature, but is also essential to the maintenance of a vigorous, competitive, economic climate. TECHNOLOGICAL INNOVATION: ITS ENVIRONMENT AND MANAGEMENT INNOVATION IN CONTEXT We have already noted that technological innovation, in the sense we have been asked to be concerned with it, is a complex process by which an invention is brought to commercial reality. It is our thesis that if we are interested in increasing our rate of economic growth and the vigor of competitive forces in our society, we need to remember that these goals cannot be satisfactorily achieved in the absence of technological progress—i.e., the bringing of new products, processes and services to market. We need also to bear in mind that the path between an invention (or idea) and the market place is a hazardous venture, replete with obstacles and substantial risks. It is ordinarily a very costly, time-consuming, and difficult task that the innovator faces. INNOVATION IS NOT SIMPLY R&D Continuing the series of basic questions we put to ourselves, we asked what it is the Government should seek to promote. Should attention be focused on the total process of innovation or merely on the research and development phase of the total process? We came to realize early in our analysis how very little statistical evidence there is on the innovative process. Such data as are available primarily concern research and development, not the total innovation process, of which R&D is only a part. These data give us a reasonable indication of the investment in R&D, who is performing it and to what extent. But they are not reliable indications of innovative performance. They do not tell us, for example, what the total investment in innovation is in the United States. Such information would be very useful to have. Indeed, it would be highly desirable to encourage systematic studies of the innovative process in order to clarify the strategic elements which stimulate and further innovation. We wish to make quite clear, therefore, that our analysis could not be based upon empirical data on the innovative process. Rather, we have had to rely on personal experience and knowledge and, where appropriate, data concerning R&D. INNOVATION IN CONTEXT 9 Accordingly, in order to arrive at a reasonable indication of the distribution of costs in successful product innovations and, particularly, to examine the role of research and development in the total process of bringing a new product to market, we pooled the knowledge of experienced members of the Panel. On this basis, we tried to discern a representative pattern in the distribution of costs in successful product innovations. There was sufficient similarity in the experiences we covered to convince us that it would be desirable to present the following "rule of thumb" figures as the basis for our discussion. This breakdown of cost and effort indicates that the step we commonly call research, advanced development or basic invention, accounts, typically, for less than 10% of the total innovative effort. The other components, which we do not usually associate with the innovative process, account for something like 90% of the total effort and cost. Engineering and designing the product, tooling and manufacturing-engineering, manufacturing start-up expenses, and marketing start-up expenses, are all essential to the total process. It is obvious, therefore, that research and development is by no means synonymous with innovation. The above analysis concerns successful product innovations. We tried to get some indication of the ratio of R&D costs to the total costs of innovative activities, both successful and unsuccessful. As a very rough measure of this, we compared total company expenditures on R&D in the manufacturing sector with the total net sales of these companies.' The latest year for which such data are available is 1964. We make no pretense about the adequacy or relevancy of these data. The total net sales for 1964 amounted to $293 billion; company-financed R&D expenditures totaled $5.7 billion. The ratio of R&D costs to net sales was therefore approximately two per cent, which would indicate that R&D costs are a small part of the total effort in the manufacturing sector. Another illustration of the need for careful study of the innovative process is the indiscriminate use of statistical aggregates purporting to show the comparative innovative performance of various countries-in particular, statistics comparing research and development expenditures as a percentage of gross national product. As a measure of our innovative performance as a nation, data such as in the following tabulation are occasionally cited. We believe such data to be an inappropriate index of innovative performance. CHART 8 TOTAL EXPENDITURES ON RESEARCH AND DEVELOPMENT, SELECTED COUNTRIES. 1 "Basic Research, Applied Research, and Development in American Industry, 1964," Reviews of Data on Science Resources, No. 7, January 1966, National Science Foundation, Washington, D. C. |