The future of US techno-hegemony

Why and how ‘financialisation’ threatens innovation and enterprise in America Inc.

Linda WeissIt’s well known that the United States has led the world in breakthrough innovations. Think computers and software, aeronautics and communication satellites, biotechnology and the internet, to name a few.  Almost every radical innovation that we can think of in the postwar period has come out of the United States.

But why the United States leads – why it came to be a formidable techno-leader – is a question that has rarely been posed and, least of all, well understood.  A popular view would have it that America leads because it has a risk-taking culture of entrepreneurship (Silicon Valley always looms large in this context).  My research turns this idea on its head:  America leads because its entrepreneurial class has a risk-taking state.

The United States is a high-tech hegemon because it has a state whose risk appetite is enormous, extraordinary and enduring.  This risk appetite is stimulated by strategic imperatives (the perception of external threat) – and fed by perpetual innovation (in the quest for technological supremacy).  It is this strategically driven appetite for risk that is especially conducive to fostering radical innovation.

The question of America’s techno-hegemony interested me because its capacity to pour out breakthrough innovations is a relatively recent development, having emerged after the Second World War.  What new development helped to make that happen?

The answer lies within the American state itself.  The US built a national security state (or NSS) designed to cope with the Cold War and pursue its grand strategy of achieving technological superiority over any potential rival.  The NSS spans many mission agencies and is broader than the military itself.  Driven in the first instance by rivalry with the Soviet Union (and later with a techno rival, Japan), the United States created a complex of federal agencies, labs and programmes to build superior technology and prevent the sort of technological surprise generated by Russia’s launch of Sputnik.  As the US entered into a state of permanent defence preparedness, centred around technological domination, this national security state soon became the nation’s engine of innovation and enterprise.

But the NSS has also steadily become more active in the commercial arena, often assuming business and entrepreneurial functions.  Far from simply funding R&D, the NSS has set about creating venture capital funds, investing in private companies, encouraging entrepreneurial initiatives and commercialising innovations in tandem with the private sector.  So what’s going on?  It would be easy to leap to the conclusion (as some have done) that the United States is thereby preaching free market ideology while doing industry policy beneath the radar.

To see why this economic (‘industry policy’) view is mistaken we need to factor in the critical domestic pressures to which the security-oriented agencies have had to respond in order to maintain America’s techno-hegemony.  For the fact is that the constant pressure to innovate, to remain at the technological forefront, has been exacerbated by the private sector’s chronic reluctance to work with the NSS. Although the suppliers of high-tech solutions of interest to the NSS are often the very companies that emerged and grew strong on the basis of public contracts (think Intel, National Semiconductor and so on) they actually tend to prefer the more rewarding commercial markets – unless the incentives are made sufficiently rewarding to attract them.  And that’s precisely what has transpired. The NSS has responded to the problem of attracting innovative companies to work on its projects by co-designing and then commercialising dual-use technologies.

Indeed, the NSS has done more than this, often entering the commercial space in its own right, either as venture capitalist or commercialisation entity, typically deploying hybrid forms that combine public ownership with private management.  The US government has a lengthy history of creating hybrids to pursue its public policy goals. Generally market-led in appearance and state-driven in origin, hybrid entities provide the vehicles by which government operates in the economy, as it were, ‘out of sight’. ‘Hybridisation’ thus allows considerable state activism in a political environment otherwise noted for the strength of its anti-statism.

But all is not well with America’s formidable innovation engine.  For one thing, a new era of multiple asymmetric threats to national security has in some respects blunted the strategic focus on technology development in order to manage shorter-term projects.  Yet even more important for transformative capacity is the ‘disconnect’ between innovation and production that ‘financialisation’ has helped bring about.

As US corporations have become increasingly ‘financialised’, they have preferred (or been pressured to) give profits back to shareholders – to the neglect of investing in R&D or new plant and equipment.  The US is now the outlier in the extent to which its companies have downsized their workforces and distributed production to foreign jurisdictions.  In the effort to maximise shareholder value, offshoring production has been taken to an extreme.  Even for the Silicon Valley start-up, one of the first questions the venture capitalist is likely to ask is: ‘What’s your China strategy?’

Arguably, then, the greatest threat to US preeminence in the technology arena comes not from China, but from within.  Recent research from MIT finds that large ‘holes’ in the industrial ecosystem are appearing as manufacturing activities disappear, and that by destroying the manufacturing base – whereby ideas are turned into products – the capacity to innovate is steadily being eroded as well.  This disconnection between innovation and production thus has large implications for economic prosperity, job creation and income distribution – not to mention national security….

A 2005 Defense Science Board task-force on high-performance microchip supply had this to say about the relocation of production from the United States to countries with lower-cost capital and operating environments: ‘From a U.S. national security view, the potential effects of this restructuring are so perverse and far reaching and have such opportunities for mischief that, had the United States not significantly contributed to this migration, it would have been considered a major triumph of an adversary nation’s strategy to undermine U.S. military capabilities’.  This theme, by the way, was repeated in the Board’s more general report this year, albeit in more subdued language.

I’m reminded of the adage which warns that one’s strengths can become one’s weaknesses – a road travelled by at least one other Great Power that turned its attention to finance at the expense of manufacturing.  The US may yet arrest this process, less by re-shoring production than by generating new enabling technologies that will underpin an era of smart manufacturing.   But, in any such revival, we should expect the NSS to remain the chief protagonist.

This post is based upon Professor Weiss’s new book, ‘America Inc? Innovation and Enterprise in the National Security State’, Cornell University Press, 2014.