This paper assesses the structure and functioning of the U.S. federal government's innovation policy, focusing on those programs that are designed to promote commercial innovation. Using economic and political theory, institutional analysis, program data, and comparisons with innovation policies of U.S. states and other nations, the paper identifies the strengths and weaknesses of the current federal approach to innovation. The paper distinguishes between the inputs to innovation (such as the science and engineering workforce, funding for basic research, and the patent system) and the organization of those inputs to produce commercial innovation. Since World War II federal innovation policy has emphasized the former and, although there is need for improvement, created effective policies to develop the inputs to innovation. For much of the postwar period the U.S. left the organization of innovative inputs to firms and the market. During the last two decades, however, this system has not worked as well as it did previously. In the face of growing short-term competitive pressures, large firms perform less R&D than they did previously, other institutions (such as venture capital) have also shifted away from funding risky innovative activity, and industry-university R&D partnerships are subject to coordination failures that reduce their effectiveness as substitutes for the R&D that large firms previously performed internally. In addition, market forces per se cannot efficiently allocate resources to the organization of innovation because of well-known positive externalities from innovative activity. As a result of the shift away from large firms and toward the market as an organizer of innovation, a federal policy that is almost entirely devoted to increasing the supply of inputs to innovation is no longer adequate. The paper identifies major weaknesses in federal innovation-promotion programs. Those programs operate in an ad hoc manner rather than as part of an overall federal effort to promote innovation. Although a number of federal programs help companies become more innovative or productive (notably the Manufacturing Extension Partnership Program, Technology Innovation Program, Workforce Innovation in Regional Economic Development Program, and the commercialization-related programs of the National Science Foundation), there is no federally funded organization whose sole mission is to spur innovation. At best, federal programs treat innovation as a byproduct of other goals or deal with limited aspects of the problem, such as university technology transfer or performance improvement in manufacturing. Furthermore, most federal innovation-related programs are designed to help individual firms, not to promote innovation across firms as well as within them. The federal government invests little compared to other nations in innovation-promotion activities, and those programs that focus most directly on such efforts have seen their budgets decline or grow more slowly than the economy overall. Federal innovation efforts are focused on larger firms and a few major research universities and less on the process of commercialization, which requires public and private entities of all sizes. Federal programs give little attention to innovation in services, despite the fact that services account for the majority of U.S. employment and output. Finally, most federal programs do not coordinate or collaborate with innovation-policy efforts by state or local governments or regional organizations. These weaknesses of federal innovation policy contrast sharply with the strengths of state and local innovation policies and of other nations' innovation policies. Since the 1980s, when the U.S. all states and many local governments and metropolitan business alliances have established technology-based economic development programs. These programs remedy some of the defects of federal policy but, because they are subject to positive externalities and political failures, do not fully make up for those defects. Many other economically advanced nations, from Finland to Britain to Japan, have begun to establish national-level government or public-private programs whose sole purpose is to work cooperatively with business to promote commercial innovation. These programs do not conduct a centralized industrial policy in the sense of favoring specific activities for private investment, but instead help firms identify and overcome barriers to innovation. The paper concludes that the federal government should address the shortcomings of its current innovation policy by creating a National Innovation Foundation, as federally funded organization that would adapt the features of other countries' innovation-promotion agencies to the American political landscape.
