The Role of GovernmentOur research suggests that governments -- both national and local, in the United States and around the world -- can support companies in three major ways: by boosting their payback on innovation, by supporting their innovation activities, and, most important, by improving the innovation environment. In addition, governments can play a role by encouraging the development of industry clusters, which can improve the innovation environment. Boston Consulting Group, Inc.BCG_ea60f656-e4f7-11e3-b92e-a9ea913a63b5James P. AndrewCo-Author -- James P. Andrew is a senior partner and managing director in the Chicago office of The Boston Consulting Group and the leader of BCG’s global innovation activities. Andrew TaylorCo-Author -- Andrew Taylor is a partner and managing director in BCG’s Chicago office. The Manufacturing InstituteTMI_ea60f926-e4f7-11e3-b92e-a9ea913a63b5Emily Stover DeRoccoCo-Author -- Emily Stover DeRocco is president of The Manufacturing Institute and a senior vice president of the National Association of Manufacturers. _ea60fad4-e4f7-11e3-b92e-a9ea913a63b5To suggest ways that governments can support companies_ea60fbb0-e4f7-11e3-b92e-a9ea913a63b5PaybackBoost Company Payback on Innovation_1fba5f1f-e547-11e3-8c69-c0b8913a63b51GovernmentsCompaniesInnovation is necessary for long-term survival but can be unprofitable in the short term -- a major challenge for companies and one that fiscal policies can address. Governments can help improve innovation profitability by lowering companies’ costs or increasing their revenues. Tax CreditsProvide consistent tax credits_1fba5f20-e547-11e3-8c69-c0b8913a63b51.1R&D tax credits are among the most common ways to lower innovation costs. Our analysis showed a strong positive relationship between R&D tax programs, GDP, and performance on the International Innovation Index. Of the top 20 developed economies by GDP, 19 have R&D tax-relief programs. Interestingly, the size of the credit seems to have little impact -- primarily because innovation is such a business necessity that companies rarely change their innovation activities on the basis of the availability of tax credits... As one executive explained, “While helpful, R&D tax credits are not a deciding factor in investment decisions. They are a ‘thank you’ instead of a motivator.” Not that tax credits are unimportant. In fact, they are highly appreciated. In our survey, executives at both large and small companies ranked R&D tax credits as their preferred form of government support. More important than size is their dependability. According to our respondents, the inconsistency of tax credits in the United States diminishes their value because they can’t be counted on and planned for. “It’s like a guillotine hanging over our neck every year,” remarked one executive. “Will they give them to us or won’t they?” Added another, “Technologies take time to develop, and it’s very difficult to plan when business policy is likely to change multiple times during the course of a [multiyear] project.” Given how long the innovation process can take, consistent and ongoing government support and policies are important.RevenueSupport revenue streams_1fba5f21-e547-11e3-8c69-c0b8913a63b51.2In addition to lowering costs through tax credits, governments can help boost company profitability by supporting revenue streams. Most countries have policies to register and protect intellectual property. The risk of losing the rights to an invention or product because of a lack of policy or poor enforcement is a top issue for business executives and can lead to loss of revenues. As a result, companies operating in countries where intellectual property protection is limited are likely to conduct their innovation activities elsewhere. SupportSupport Innovation Activities _1fba5f22-e547-11e3-8c69-c0b8913a63b52Many countries, and many U.S. states as well, choose to engage directly in research activities, primarily through government grants or government-funded laboratories and research centers. These activities can lead to increased innovation performance... But the impact of direct funding on innovation is limited when the available funds are not substantial or when government support is dwarfed by other sources of funding. For example, small countries and individual U.S. states face a significant challenge in achieving critical mass in R&D funding. In the United States, total state funding of R&D amounts to less than 0.3 percent of the total pool of funds earmarked for R&D, making state investments of minimal importance.PartnershipsBe more thoughtful about how government, universities, and companies collaborate on joint research projects_1fba5f64-e547-11e3-8c69-c0b8913a63b52.1GovernmentUniversitiesCompaniesNonprofitsEducational InstitutionsEspecially when funds are limited, governments at all levels may find it advantageous to engage in partnerships with businesses, nonprofits, or educational institutions to increase the scale of their support for innovation and achieve greater results. The challenge is to profit from these partnerships by commercializing the results. Many of the U.S. executives we surveyed reported some difficulty capitalizing on these relationships. As one executive put it, “The government needs to be much more thoughtful about how government, universities, and companies collaborate on joint research projects. It needs to get away from the schizophrenic mentality, be more efficient, and improve project management to produce better results.” Environment for InnovationImproving the Environment for Innovation _1fba6964-e547-11e3-8c69-c0b8913a63b53Work Force QualityImprove work force quality_1fba6a40-e547-11e3-8c69-c0b8913a63b53.1Work force quality is the primary indicator of innovation success... It is therefore not surprising that one of the top concerns of business executives is finding high-quality talent. Governments can take many actions to improve work force quality, including but not limited to investing in education and effectively addressing immigration issues. EducationInvest in education_1fba6a41-e547-11e3-8c69-c0b8913a63b53.1.1ImmigrationAddress immigration issues_1fba6a42-e547-11e3-8c69-c0b8913a63b53.1.2AlignmentAlign academic and technical programs with industry needs and standards_1fba6a43-e547-11e3-8c69-c0b8913a63b53.2Secondary SchoolsWhile education and work-force-development reforms can take many years to have an impact, some reforms yield results much more quickly. For example, better integration of academic and technical education in secondary schools can ensure that graduates are ready for work or college. When academic and technical programs are aligned with industry needs and standards, students gain recognized credentials and companies gain skilled workers. CostsLower the structural costs related to fiscal policy, regulation, and energy_1fba6a44-e547-11e3-8c69-c0b8913a63b53.3CountriesStatesCountries and states can also improve the business climate by lowering the structural costs related to fiscal policy, regulation, and energy. Although our assessment did not directly address these factors, they have a major impact on the decisions that executives -- particularly in manufacturing -- make about production locations. And because so much innovation occurs on the shop floor rather than in the R&D lab, maintaining a manufacturing presence is critical for countries and states alike.Industry ClustersPromote Industry Clusters_1fba6a45-e547-11e3-8c69-c0b8913a63b54Industry ClustersClusters are groups of related, interdependent companies within the same industry that are concentrated in a geographic area.National GovernmentsBy attracting or establishing groups of manufacturers in specific industries, national governments can help drive innovation performance and sharply improve their country’s economy. Smaller CountriesThis approach can be particularly effective for smaller countries -- some of which rank high on the International Innovation Index because of the presence of industry clusters -- and is likely to enhance innovation in individual states as well. But it is less useful in large countries, where any one cluster is too small on a relative basis -- at least initially -- to have a real impact. And since clusters account for only a small percentage of overall output, they’re often overshadowed by other drivers, such as work force quality, education, and fiscal policy.Governments can also support innovation by encouraging the development of industry clusters... Although small countries can bet on specific industries to kick-start innovation (and growth in general), targeted cluster development is not without risk. Concentrated economies, no matter how successful they are for a time, ultimately rise and fall on the results of a limited number of industries. It is a high-risk, high-reward policy._1fba6a46-e547-11e3-8c69-c0b8913a63b52009-03-312014-05-26http://www.themanufacturinginstitute.org/~/media/6731673D21A64259B081AC8E083AE091.ashxOwenAmburOwen.Ambur@verizon.net