A Bretton Woods for Innovation

Marshall Hopkins

Sixty-seven years ago, representatives from 44 nations convened in the small resort town of Bretton Woods, New Hampshire to make financial arrangements for the post-World War II economy. The meetings spawned the International Monetary Fund, the World Bank, and the General Agreement on Tariffs and Trade—the precursor to the World Trade Organization. While these institutions worked well for half a century, now that the commodity-based manufacturing system has evolved into a knowledge and innovation economy, the strains on the Bretton Woods system have become clear.

As countries increasingly recognize that innovation drives long-run economic growth, a fierce race for an innovation advantage has emerged. During the past decade alone, over three dozen countries have created national innovation agencies and strategies. Going forward, the challenge will be to balance countries' pursuit of the highest possible standard of living for their citizens in a way that promotes, rather than distorts, global innovation.

We need a new international framework that sets clear parameters for what constitutes fair and unfair innovation competition, creating new institutions (and updating old ones) that maximize innovation.

The Good, the Bad, the Ugly

Countries' focus on innovation as the route to economic growth creates both opportunities and risks. They can apply their innovation policies in ways that are: "Good," benefiting the country and the world simultaneously; "Ugly," benefiting the country at the expense of other nations; "Bad," appearing to be good for the country, but actually failing to benefit either the country or the world; or "Self-destructive," failing to benefit the country while benefiting the rest of the world.

"Good" innovation policies include increasing investments in scientific research; offering research and development tax credits; welcoming highly skilled immigrants; providing strong science, technology, engineering, and math education; and deploying advanced information and communications technologies. Countries' "Good" innovation policies are positive for the entire world—as discoveries, inventions, and innovations made in one nation ultimately spill over to the benefit of citizens worldwide, even as they drive economic growth in the originating nation. For example, the United States initially profited the most from creating the Internet (enormous economic growth was generated by startup "dot-coms"), but now the Internet's benefits flow to billions around the world.

Countries' "Ugly" policies include intellectual property theft or forced technology transfers as a condition of market access (designed to promote innovation in one nation to the detriment of others). China's government forces many multinational companies to share their technologies with state-owned enterprises in order to operate in the country. To compete in China's high-speed rail market, for example, foreign multinational locomotive manufacturers like Japan's Kawasaki or Germany's Siemens had to offer their latest designs and produce 70 percent of each system locally. As a result, China's state-owned locomotive manufacturers, CSR and CNR, acquired key technologies and manufacturing know-how. Now they not only dominate China's market but compete internationally against the same multinationals that supplied them with the knowledge and skills in the first place.

"Bad" policies are strategies like import substitution industrialization that a country believes will help it, but in fact do more harm than good to the country's economy. For every dollar of tariffs that India imposed on imported information technology products (in its effort to spur creation of an indigenous information industry) it suffered an economic loss of $1.30 because its firms and citizens had to use inferior technologies. Back in the days of Indira Gandhi's rule, news bureaus seeking to bring the first American PCs into New Delhi found them impounded, and their executives told they should buy an Indian product—a gargantuan contraption with vacuum tubes that took up a large room.

Finally, "Self-destructive" innovation policies, such as the United States' unwelcoming posture toward highly skilled immigrants, hurt a country while actually benefiting competitors.

Sadly, there is disturbing evidence that the global economic system is increasingly distorted, as a growing number of countries embrace what might be called innovation mercantilism. These approaches are based on the...