The Innovation Myth

There are a plethora of articles that discuss the innovation economy. The articles usually come to the conclusion that the US economy can flourish as an innovation economy. That is as long as we improve our education and keep our capital markets open. I have skepticism about the merits of the innovation economy.

To try to address my skepticism I need to find an innovative product that was invented in America, but mostly manufactured elsewhere. Such a product would give us a good measure of the merits of an innovation economy. A quick read of my “Follow the Money” post provides the perfect product, the iPod.

If you did not read that post, the iPod is a product where most of the intellectual property was developed in the US, but most of the manufacturing was done elsewhere. I would also add that the iPod is a good example since it is neither to complex nor too simple. In short, the iPod is a pretty good product to use in deciding if innovation only is enough to power the domestic economy.

If we use the iPod, the merit of the innovation economy does not match the hype. A final point of the “Follow the Money” post was that the iPod was actually a net negative on the economy. Due to the size of the US market, so many more iPods are sold here then in other markets combined. This translates into more dollars leaving the US economy then coming in due to foreign iPod sales.

Does this mean that education and capital markets are not important? In fact, it is quite the contrary. The iPod’s drain on the economy would have been much worse if it was invented somewhere else. That is why the iPod is a vastly superior choice then a Japanese or Korean MP3 player. So I guess the articles are right, education and capital are the cornerstones of the innovation economy, but what they leave out is that we are still in a losing battle.

The problem is that the innovation economy is just not sustainable. The problem is exacerbated by the fact that more of the high level design work is moving offshore. The more of the product development, support, marketing, etc that is done offshore the worse it is for the domestic economy.

The good news is that it is not a fata compli just yet. There is still enough of a manufacturing base in America to overcome the problem. Keep in mind that if only one of the major components of the iPod was manufactured in America, it would turn the iPod into a net positive. That is why it is so critical that we all make informed decisions on our buying.