Key Factors Most Affecting Innovation in the US

Innovation is a broad area of the US economy that means vastly different things to different people. The definition is even widely debated depending on the context of its use.

In preparation for the upcoming Colorado Innovation SummitTM we have been examining the world of innovation and have identified the top trends impacting innovation.

The research team at the DaVinci Institute has spent the past few months reviewing hundreds of factors influencing innovations in the US. Using a scoring system designed to assess the overall impact of each of these factors; a group of the Institute’s staff and advisors weighed in.

The effects of globalization are clearly evident as R&D money begins to shift to China and India. And the baby boom demographic is also creating havoc both in the areas of retiring scientists and engineers and our country’s ability to backfill these vacancies with competent new hires.

The proliferation of new technologies is also evident in the sheer volume of patent filing and the vast number of products in the marketplace.

Three categories of technology made the list as being the most promising areas for innovation. These areas include mobile and wireless, biotech, and entertainment. It was felt that these areas would be dominated by U.S. innovations for many years to come.

1.  The Age of 100 Million Products – We have a very crowded marketplace and its becoming even more crowded.

  • Amazon boasts over 1 million book titles for sale through its site.
  • Café Press features over 4 million unique products.
  • The Software Superstore advertises over 1 million products. 
  • ITunes claims to offer over 700,000 songs in each of its four base countries. This is a number that is growing fast.
  • Network Solutions currently hosts over 7 million domain names and their closest competition, GoDaddy, has over 5 million. 
  • Sale of unique Google keywords is only limited by the ingenuity of the purchasers and the number of languages that it’s been adapted for. 
  • eBay alone had 332.3 million merchandise listings in the second quarter of 2004. Although each of these listings are not unique products, it does represent the intense volume of options for consumers. 

As we approach the age of 100 million products in the marketplace, the time, money, and talent needed for a new product to rise above the noise and gain the attention of targeted consumers becomes exponentially more complicated.

2.  Patent Filings Reach All-Time High – American ingenuity is at an all-time high. To give you a sense of the volume, the patent office received 355,418 patent applications in fiscal 2003. During this same period of time it granted 189,587 patents. The backlog of patent applications is approximately 475,000 deep, and inventors who file a patent wait an average of 27 months for their application to be processed.

In spite of numerous complaints about the system, industry is relying more and more on the patent system to protect its intellectual treasures. However, this “rush to protect” also brings with it the need to embrace legal strategies to enforce this protection. Innovation is not just about inventing the technology; it’s a relentless drive to gaining an unusual competitive advantage.

3.  The Next Big Thing was Invented Over 25 Years Ago – The Internet just turned 35 years old. In 1973, Dr. Martin Cooper invented the cell phone, and now 31 years later the industry is in full bloom. With only a few minor exceptions, the time it takes for a major innovation to gain a significant foothold in the marketplace is always more than a generation.

So if you’re wondering which invention will be the next one to take the market by storm, just look around. It’s already been invented, has a small but growing marketplace, is being carefully watched by a few industry analysts, and will truly break free once the government has established a series of laws to define the industry.

If you’re wondering what the rate of change will be like 25 years from now, just look at the number of today’s patent filings. The changes will indeed be quite staggering.

4.  R&D Investment Shifts to China and India – When you look at investing in R&D, China has emerged as the clear favorite in a new survey. A global survey of 104 senior executives conducted by London-based Economist Intelligence Unit shows the growing attractiveness of the Asian markets as the choice location for technology innovation.

China was way in front with 39% of respondents naming the mainland as their top choice for R&D spending. A total of 29% chose the US, while 28% favored India for overseas R&D spending over the next three years.

A total of 52 per cent of firms plan to increase their overseas investment in R&D over the next three years, while another 38 per cent plan to maintain current spending levels over the same period.

Britain was in fourth place, favored by 24 per cent, and Germany was the choice of 19 per cent of the executives polled. Others in the top 10 were Britain (24 %), Germany (19%), Brazil (11 %), Japan (10 %), France and Italy (both 9 %), and the Czech Republic (8 %).

Among companies that are publicly traded in the U.S., those that are headquartered abroad are spending more than U.S. firms on R&D as a fraction of sales. This ratio, which is termed research intensity, is 4.2% for firms based in Japan, 3.2% in Germany, 5.7% in Finland, and 5.1% in Sweden. But this figure is just 1.7% in the U.S. and the U.K.

5.  The Great Talent Gap Continues to Grow – The number of U.S. jobs requiring science and engineering skills is growing at nearly 5% annually, compared with a 1% growth rate for the rest of the U.S. labor market. But several forces are hamstringing the nation’s ability to meet this demand for qualified scientists and engineers.

Nearly 50% of today’s workforce will become eligible for retirement by 2012 according to the Bureau of Labor Statistics. As a result, many of those currently working in science and engineering positions will retire in the next 20 years, while a smaller number of students are choosing science and engineering careers to take their place. The United States has fallen from third place in 1975 to 17th place compared to other countries in the proportion of 18 to 24 year-olds earning science and engineering degrees.

According to a recent report by the National Science Board, record numbers of foreign-born science and engineering professionals have filled this gap over the past several decades. Between 1990 and 2000, the proportion of foreign-born people with doctorates employed in U.S. science and engineering occupations rose from 24 to 28%. And in 2001, more than half the U.S. engineering and computer science graduates were foreign-born students. But restrictions on visas issued to students and scientists following the September 11 terror attacks have sharply curtailed this inflow.

Further complicating the situation, opportunities for science jobs in other countries are luring qualified scientists away from the United States. As a result, the National Commission for Employment Policy has stated that a massive shortage of skilled workers beginning in 2005 will make the labor shortfall of the late 1990’s seem like a minor irritation.

6.  Time Compression Driving Consumer Behavior – Technology is the engine propelling time compression. While the overall trend began over 150 years ago with the introduction of time zones, it got a big boost in the 1940s with the introduction of fast food and the microwave oven, instant photography, and commercial airliners.

Computer technology raised the bar further when Moore’s Law and its 18-month cycles moved the product development needle from steady to fast. Kids growing up in the new gadget world evolved into adept multi-taskers, with computer-driven solutions making things happen faster.

In the 1920s, the average U.S. adult slept 8.8 hours each day. By 2001 that figure had declined to 6.8, fully two hours less, according to the NIH. 34% of lunches are eaten on the run, according to National Eating Trends, a trend fueled by the $112 billion U.S. fast-food business. Speed dating is now having a major impact on the dating scene. 66% of people today watch TV while simultaneously surfing the web. Understanding time compression is one of the keys to unlocking future consumer behavior.

A survey by Reuters demonstrates the anxiety people have over living in today’s fast paced society. 49% felt they were unable to keep up with the flow of information. 43% were having trouble making important decisions because of data overload. 38% said they waste substantial amount of valuable time trying to locate needed information. And 33% suffered from stress-related health problems brought on by too much information.

7.  Aging Marketplace Driving Biotech – As the baby boomers approach retirement age, they bring with them a strong desire to live well past the age of their parents and grandparents, and maintain a healthy lifestyle in the process. Life expectancy has been increasing in the range of 2.5 years every decade. But simply living longer is meaningless without being able to maintain an active fully mobile lifestyle.

As an example, a growing number of older persons susceptible to heart failure are contributing to an epidemic of hospital admissions, according to a study by the Mayo Clinic. Admissions due to heart failure have increased 155% in the past 20 years among Americans over age 65–not because of increased rates of disease but because more people are surviving the disease.

The U.S. currently spends more on healthcare than any other nation on earth. Spending in 2003 of $1.7 trillion is expected to reach $3 trillion within a decade, making this by far the world’s largest industry by far.

8.  Transition to Mobile and Wireless Driven by Desire for Freedom – In a battle between wires and wireless, consumers will invariably opt for wireless. Freedom sells. However, infrastructure costs, security issues and quality of service problems have made this transition a tricky playing field.

The wireless movement will continue to infiltrate our lives as more product roll out with options to eliminate wires, from the desktop to mobile media players, cell phones and PDA’s with the combined use of Bluetooth, Wi-Fi, ultra wideband, infrared and RF transmission frequencies. As Wi-Fi connects most home networks, the cost and security of these access point transmitters will become better and cheaper.

While the voice market will continue to dominate revenues and profits in the overall wireless marketplace, the biggest new areas of opportunity will be in mobilizing corporations. As the talent searches intensifies, the need for establishing “pocket” operations and telecommuting options will also increase. The goal of creating an anywhere, anyplace, any time Internet remains a few years off, but the demand for this type of access is clearly growing.

9.  Entertainment: A Hotbed for Innovation – The global media and entertainment industry is picking up speed and is set to grow at an annual rate of 6.3% during the 2004 to 2008 time frame, hitting $1.67 trillion in 2008, according to PricewaterhouseCoopers. One rich area of opportunity is in the video gaming world.

Nielsen Media ignited a storm of controversy among TV executives last fall when it reported a 7.7 percent decline in prime-time viewing by men aged 18 to 34. Nielsen cited growing competition from video games and DVDs. The average game player is currently 29 years old.

A new report from DFC Intelligence forecasts that the worldwide market for online games will reach $9.8 billion in 2009. This represents a 410% increase over 2003 revenue of $1.9 billion.

A recent study by Deloitte Research reports the number and range of platforms on which paid-for electronic games can exist will expand significantly and will include mobile phones, MP3 players, PDAs, set-top boxes, children’s toys and even exercise machines. The installed base of devices will escalate from 415 million in 2004 to 2.6 billion in 2010.

But the TV industry is not dead. In 2004 U.S. consumers will purchase roughly 25 million new TVs of which only a small percentage are the new HDTV. But that will change quickly as HDTV sales are expected to reach 58 million sets per year worldwide by 2007.

10.  Politics Trumps Technology & Business – While not exactly a new trend, the role of politics on emerging tech fields has never been greater. A single vote in congress can change an entire industry.

For an emerging industry to establish itself, the government needs to create a series of public policy decisions to organize the playing field. Without the government’s “blessing”, emerging new industries can only aspire to a small percentage of their true potential.

A perfect example is the satellite radio industry that has yet to receive the keys to operate the way they want. Relentless lobbying by the traditional radio industry has saddled the young satellite companies, like XM Radio and Sirius, with unreasonable operating restrictions, significantly impairing their ability to compete.

In a similar vein, Dean Kamen’s Segway creates a new category of transportation. While some municipal governments have imposed regulations on the operation of the machine, the device is still treading in unchartered territory. Once sales reach a certain threshold and government leaders are pushed into establishing public policy, the true potential for this industry remains unknown.

We invite your feedback. While many more items were considered than made the list, we readily admit that we may have missed some concepts. Whenever we look into the crystal ball, we sometimes become so enamored with the ball itself that we miss out on the big picture.

by Thomas Frey, Executive Director of the DaVinci Institute

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