Is the Unites States Losing Its Innovation Edge?

The world is flat. Globalization changed the world in a lot of ways we never thought of. Nations used to self provide and sell their surplus production to other nations, but now they sacrifice the production of goods that they are not great in producing in favor of goods that they are great in producing. International trade also resulted in competition and better quality of products. Buyers that originally had a restricted market can now expand their horizon in search of a better deal, i.e. goods with higher quality at the same price, or same quality but at a lower price. Producers and sellers compete to convince buyers that their products are the best in the market, some by exhibiting their goods in trade shows and others by pushing their price lower. Ultimately, all these are beneficial to the customers. Nevertheless, to every action there is a counter-reaction. Globalization also brings negative effects to some parties. Domestic economies are made vulnerable to disturbances initiated overseas, employees are laid off when companies move overseas and in the process new technologies are taken with them.

The brainchild of Amazon engineers and designers, the Kindle was born in a research facility in Silicon Valley in 2006. Kindle’s electronic ink technology enables users to read newspapers, magazines, textbooks, and other digital media that has been downloaded into a portable computer screen. In 2007 the world was introduced to a new product that will revolutionize the e-book community. After the introduction, Kindle remained out of stock for five months due to high demand and low supply. For the production of Kindle’s electronic ink, Amazon decided to partner with a U.S based company E-Ink Co. but soon after it became clear E-Ink does not have the means to produce the screen the Kindle needs. Even though Amazon searched for another U.S. based firm to partner with, they cannot find one and had to look abroad where they found Prime View, a Taiwanese manufacturer, who could produce the compatible screen. Eventually Prime View bought out E-Ink and moved their production from United States to Taiwan. In the case of Amazon Kindle, the breakthrough innovation of the electronic ink was introduced by the United States but the Taiwanese company largely captured the value added in producing the Kindle.

The big question is why was the United States not able to manufacture the screen that was compatible with electronic ink. The electronic ink was designed by MIT students in 1997 and it was featured in the cover page of the international weekly of science - Nature in 1998 (Barrett Comiskey, et al). In order to commercialize the technology, the inventors worked together with other researchers and founded E-Ink Corp. Two years later they formed a partnership with Philips Components to develop and market the technology. In 2005, Philips sold the electronic paper business as well as its related

patents to Prime View International. Subsequently, E Ink also sold its business to Prime View in 2009 (E-Ink).

In the case of Kindle if we look at it more closely we can see that E-ink may have been the producer of the electronic ink, but they had did not have the means to commercialize the product without partnering with someone else. Their only product was the electronic ink and they did not go beyond that innovation. In order to better ourselves, one needs to keep improving and that saying goes for products too. In order to keep ahead of the market, companies need to keep improving their products. In this case E-ink should have started improving their products and expanding their product line at the opportunity to partner with Amazon. “Even though the electrophoretic beads were the central innovation in the Kindle, E-Ink’s inability to control the low temperature polysilicon and the fabrication of the display meant that it could not perform the system integration required for it capture the majority of the value add” (Shih). This was one of the many reasons why E-ink could not stay independent and why they sold the business to Prime View. E-ink sold the business without trying new ways to solve the problem, and because of that, the United States not only lost the value added for the screen but also any new technologies that could have stemmed from this idea.

The growth of manufacturing is the key driver of economic growth. The Industrial Revolution started in the United Kingdom in the 1760s where it was the heart of the manufacturing industry, and the United Kingdom experienced a prosperous time where it grew into one of the “Great Powers”. With time, social and economic changes, the manufacturing industry and brilliant minds shifted to the United States. Manufacturing goes hand in hand with innovation. The biggest innovations in the history of humankind came from desiring improvements in the manufacturing industry. The steam engine, the printing press, the telegraph, all these had a significant contribution to the economic development of a country. The country in which these machineries were invented experience a lead in their economic growth. With manufacturing leaving a country, there would be less innovation, and eventually there would be a period of slow economic growth. The acquisition of E-Ink by a foreign company and moving its production outside United States is one of the prime examples. While it was a logical decision made by E-Ink to sell the company to Prime View, in the long run the effect is much bigger than just one company buying another company. United States is no longer capable of manufacturing electronic ink and is only left with marketing, selling and shipping them. New cutting edge technologies most often depend on the commons of a mature industry. By losing the commons, United States loses the opportunity to become the home of innovations and the hot new businesses of tomorrow.

In broader terms, the United States earned profit from selling finished goods, and also from outsourcing - lower labor cost and energy cost. On contrary, what they lost is not in the form of profits from the product, but in the form of job opportunities in the United States. Even more serious, the possibilities of technological advances. Take Kindle for example, “We sell the hardware at our cost, so it is break-even on the hardware,” Jeff Bezos, CEO of Amazon, told the BBC. Amazon did not gain any profit from outsourcing Kindle, and the profit from manufacturing Kindle flows out to E-Ink,

which was an American company and now part of a Taiwanese company. At first, E-Ink owned the proprietary rights to manufacture and commercialize the electronic ink technology, then due to the lack of manufacturing ability of complementary technology, the electronic ink technology was acquired by another country. The said country gained the technology and independence to manufacture because they have lower labor cost and the manufacturing skills required, which allows them to catch up with the United States.

Trade deficit is another concealed problem. United States’ wealth grew when profits from domestic manufacturing were reinvested into buildings, machinery and technological change, but now outsourcing has diverted that income to foreigners (Robert Morley, 2006). More than three-fourths of all U.S. traded goods are manufactured products, so goods trade most directly affects manufacturing output. (Robert E. Scott, 2015) Kindle’s screen is one of the contributor to trade deficits. The manufacturing trade deficit from 2009 was $319 billion (1.7% of GDP) and reached $514.6 billion in 2014, and it was 3.0% of 2014’s GDP. All these numbers show that manufacturing trade deficit made it harder to recover and rebuild the manufacturing. The result is, the United States’ wealth is diverted overseas and the manufacturing production kept decreasing.

We can analyze from annual research expenditures how much we spent in the technology field. In 2014, the United States investment in R&D was $465 billion, one percent more than in 2013, and twice more than China. However, some economists speculated that China will surpass United States in the early 2020s. The Bloomberg innovation index generated 2015's most innovative countries in six tangible activities that contribute to innovation and gave them a comprehensive ranking. The index was calculated by dividing the total R&D expenditure by the nation’s annual GDP. Although the index is affected by the nation’s GDP, it clearly reveals how much a nation is willing to invest in the R&D expenditures. The graph clearly shows that a lot of countries are racing to outdo the United States in the field of innovation. Per graph below, many Asian countries like South Korea, Japan and China, are presenting high competition for United States. These countries are the main outsourcing destination for product manufacturing, such as Kindle, and they are posing a big threat to the United States.

Another reason America might be losing its innovative edge could be due to visa restrictions on foreign students. The number of Americans pursuing advanced degrees in science and engineering is declining, and the university science and engineering programs are growing more depend on foreign-born talent. Thirty percent of scientists and engineers with doctorates were born outside the country. From 1985-2000, the PhD’s in science and engineering awarded to foreign students in the US, more than half went to students from China, India, South Korea, and Taiwan (“We Are Falling Behind”). Additionally, after graduation, lots of foreign students may not be able to stay and work in the United States because of visa restrictions. Foreign students cannot contribute their knowledge towards the growth of American companies and forced to leave with their

education and talent back to their country. As a result, foreign countries are reaping the benefit of United States’ investments in human resource.

We can also see the total amount countries actually invested in research

expenditure. The United States spent $465 billions whereas countries like China only spent around $284 billion. China, as one of the most emerging developing countries these days, has increased their GDP and the percentage of R&D every year, 20% from 200 to 2010, and 1% every year between 2012 and 2014. Many economists are confident that China will surpass United States within the next ten to twenty years. Other competitive Asian countries also sustained a high percentage of R&D expenditure, with South Korea at 3.6%, also the highest one, Japan at 3.4%, Taiwan, the host in the Kindle case, at 2.4%.

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Another question is, although United States invested such a big amount in the research expenditure, where did all the money go? Half of the investment came from federal budget, another half came from private foundations, but it is hard to accumulate the outcome here so we only discussed the federal budget. As shown in the pie chart below, the President's R&D Budget for FY 2015 cost almost 52% in the fields of defense and homeland security, the National Nuclear Security Administration (NNSA), and the Department of Defense (DOD). The remaining 48% of nondefense R&D expenditure has 6.2 billions or 3% (contained in all other R&D) invested in the DOD science & technology budgetary. These basic and applied research, advanced technology development, and medical research are the ones that need the most fund. These industries which drive innovation the most has decreased 10.3% below that of FY 2014 level.

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The United States may have unsurpassable amount of investment, however, the portion of the real investments in the science field could result in the United States losing their innovation edge.

In order to keep Kindle in the United States, big changes need to take place. Starting at the corporate level, that is the American companies. Companies should practice kaizen, which means continuous improvement. They need to keep improving their product and think about what the consumers need instead of focusing on one product or invention and being satisfied. Companies should also be aggressive and stimulate the whole industry to move on. Not only do companies achieve short-term benefits, but setting higher goals for the long-term period also contributes to driving forward. Moreover, keeping an eye on competition can also help keeping the company’s information up-to-date. Executive should also not be afraid of taking risks in new ideas, and not be afraid of failing.

Together with corporate changes, United States screen industry needs to improve their technical skills. For instance, E Ink Co. should have considered producing electronic ink compatible screens instead of selling the business to Prime View and evading responsibility of solving problems. The government can also help boosting R&D in the industry by holding events such as trade shows. These events increases technological advancement awareness among the industry and has the potential to give birth to more advanced technologies. The government can also give tax credits and competitive interest rates if a company decided to keep their headquarters and manufacturing plant in the United States.

Ultimately, keeping innovation within the United States is not solely the responsibility of one group of people. It requires the cooperation of various groups and the willingness from their own heart to make it happen. It is not an easy task that can be done in a blink of an eye, especially in a highly competitive and global environment, but it is the price we have to pay if we wanted United States to maintain its innovation edge.

Works Cited

2014 Global R&D Funding Forecast” battelle.org. December 2013. Web. 27 January 2016. https://www.battelle.org/docs/tpp/2014_global_rd_funding_forecast.pdf

Augustine, Norm. “We are falling behind” Forbes-Eric Savitz 2011. Web. 27 January 2016. http://www.forbes.com/sites/ciocentral/2011/01/20/danger-america-is-losing-its-edge-in-innovation/#72c311315a2b

Clay, Kelly. ”Amazon Confirms It Makes No Profit On Kindles“ Forbes. 2012. Web. 27 January 2016. http://www.forbes.com/sites/kellyclay/2012/10/12/amazon-confirms-it-makes-no-profit-on-kindles/#7d90d3874dc7

E-Ink “History” 2015. Web. http://www.eink.com/history.html

Hourihan, Matt. “The President's R&D Budget for FY 2015: A Summary and Chart” aaas.org. 19 March, 2014. Web. 27 January 2016. http://www.aaas.org/news/presidents-rd-budget-fy-2015-summary-and-charts “Influence of research and development expenditures on number of patent” Applied Econometrics and International Development. 2005. Web. 27 January 2016. http://www.usc.es/economet/reviews/aeid541.pdf

Morley, Robert. “The Death of American Manufacturing” The Trumpet. February. 2006. Web. 27 January 2016. https://www.thetrumpet.com/article/2061.24.80.0/economy/the-death-of-american-manufacturing

Shih, Willy. “The U.S. Can’t Manufacture the Kindle and That’s a Problem”. Harvard Business Review. 12 October, 2009. Web. 27 January 2016. https://hbr.org/2009/10/the-us-cant-manufacture-the-ki/

Scott, E.Robert. “Manufacturing Job Loss - Trade, Not Productivity, Is the Culprit” Economic Policy Institute. 11 August , 2015. Web. 27 January 2016. http://www.epi.org/publication/manufacturing-job-loss-trade-not-productivity-is-the-culprit/

“The Bloomberg innovation index” Bloomberg. 2015. Web. 27 January 2016. http://www.bloomberg.com/graphics/2015-innovative-countries/