America’s innovation engine is slowing

America’s innovation engine is slowing

Caleb Watney
Resident fellow at the R Street Institute

November 24, 2020

Universities are in trouble and the influx of brainpower from overseas is shrinking. The long-term consequences could be disastrous.

Earlier this month, Immigration and Customs Enforcement announced that international students attending universities that switch to online-only courses in the fall would be required to leave the United States. By threatening student visas, the Trump administration, which has been pushing to reopen businesses and schools despite the continuing pandemic, was widely seen as pressuring colleges to resume in-person classes. If implemented, the visa policy could have driven away thousands of brilliant minds—the brainpower that, for decades, has proved essential to entrepreneurship and technological innovation in the United States.

Originally published by The Atlantic, July 19, 2020

In the end, immigration officials backed down amid legal challenges, but some damage was already done: The administration had added to the uncertainty swirling about America’s crucial higher-education sector, while also signaling to young people overseas that, should they ever want to attend an American university, they might not be welcome.

The visa debacle was only the latest of many ominous signs for the United States, long the world’s primary incubator of new technologies, new drugs, new therapies, and new business models. The coronavirus pandemic and the administration’s botched response to it are damaging the engine of American innovation in three major ways: The flow of talented people from overseas is slowing; the university hubs that produce basic research and development are in financial turmoil; and the circulation of people and ideas in high-productivity industrial clusters, such as Silicon Valley, has been impeded.

All three trends started before the coronavirus arrived, but the pandemic has accelerated them in ways that, if left unaddressed, could cripple the U.S. economy for decades. During the difficult economic recovery from COVID-19, closed businesses will be able to reopen and rehire their furloughed workers, and delayed investments will resume. But if the nation’s capacity for economic and technological innovation is diminished, Americans will feel the loss for decades to come—not just in lower GDP but in slower progress toward a vaccine for COVID-19, solutions to climate change, a cure for cancer, and more.

Over the past century, the U.S. has consistently attracted the world’s most inquiring minds and skilled workers, despite an immigration system that is in no way optimized for that purpose. More than half of American startups that became companies valued at $1 billion or more—a category that includes Google, Tesla, Stripe, and Uber—count immigrants among their founders and top executives. By some estimates, immigrants account for a quarter of U.S. invention and entrepreneurship. A large number of immigrants with technical expertise come to the United States through the university system. According to research by the National Foundation for American Policy, citizens of other countries make up huge majorities of the graduate students at U.S. universities in such fields as electrical engineering (81 per cent), computer science (79 per cent), and industrial engineering (75 per cent).

These students go on to work for artificial-intelligence companies, logistics firms, biotech labs—or start their own. When given the opportunity, they prefer to stay in the United States. More than 80 per cent of international doctoral students in artificial intelligence, for example, remain in the country after graduation, according to a December report from the Center for Security and Emerging Technology.

The Harvard Business School economist William R. Kerr has argued that the U.S. has benefited enormously from the international flow of talent. From 2000 to 2010, more immigrant inventors migrated to the United States than to all other countries combined.

The drop in international students may not be temporary. Students make plans years ahead of time, and once they decide to stay home or migrate to someplace more welcoming, the United States will likely lose out on their talents for good. This dynamic can compound over time; highly skilled people are most attracted to regions with many other highly skilled people. While the United States has raised barriers to skilled migration, countries such as Canada, Australia, and the United Kingdom have been tearing theirs down.

Until now, the U.S. maintained its reputation as the global epicenter for talented scientists and technical practitioners through sheer inertia. The pandemic, which the United States has managed far worse than other countries, could lead students and other immigrants to conclude that their best opportunity lies elsewhere. If they stop coming, that will mean fewer start-ups, fewer tech workers, fewer scientists, and ultimately fewer jobs.

As the influx of talented people from overseas slows, university bottom lines will suffer. In the past decade, international students, who typically pay full tuition, have become a major revenue source. In 2015, a financial-services firm estimated that international students, who made up 12 per cent of students enrolled at public universities, were providing about 28 per cent of total tuition revenue.

Public-university budgets were devastated after the Great Recession depleted state coffers. According to the State Higher Education Executive Officers Association, state support for public universities was still $1,000 less per student in real dollars in 2018 than in 2008. The looming state budget cuts from the coronavirus recession will only make matters worse, and the many colleges and universities, public and private, that stayed afloat over the past decade by vigorously recruiting international students no longer have that option. Without further support, American colleges and universities face significant faculty and research budget cuts. The potential for disinvestment is greatest in the science and engineering departments, which rely most heavily on international students.

These developments jeopardize the role that universities play in promoting innovation. They not only attract and train talented students; they also produce fundamental research that becomes the basis for future technological progress. They serve as focal points for commercialization through their individual patenting offices, and as collaborators for experimental product development with industry; they also help codify knowledge through journal publications. As even the richest universities cut costs and less wealthy ones ponder whether they can survive, the net effect will be less scientific research in a shrinking academic ecosystem.

Governments in other countries understand the urgency of heading off such outcomes. The United Kingdom plans to provide emergency loans to its universities to cover 80 per cent of their losses from the drop-off in international students, but the United States has made no such move. Indeed, by threatening student visas, immigration officials were poised to deepen schools’ financial woes.

Also essential to innovation in the U.S. are the high-productivity metropolitan regions, such as Silicon Valley, New York, Boston, Seattle, and Austin, Texas, where knowledge-based clusters have sprouted up, typically around universities. Engineers, academics, investors, designers, computer scientists, and supply-chain managers mingle across firms, share ideas, have serendipitous run-ins, and push one another in a way that makes the entire group more productive and creative than individuals would be in isolation. “The ten most innovative cities in the United States,” a recent research paper points out, “account for 23 per cent of the national population, but for 48 per cent of its patents and 33 per cent of its gross domestic product.” The paper goes on to argue that complex industries such as semiconductors, biotechnology, and neurobiology are even more likely to benefit from clustering in big cities when compared with less complex activities such as paper or apparel manufacturing.

Before the pandemic, housing shortages in the San Francisco Bay Area and other high-demand locations had become a major barrier to innovation and economic growth. Silicon Valley and similar clusters now face a rather different challenge: the sudden spike in remote work. The pandemic has reminded people of the value of large living spaces. Already, the least dense zip codes of metropolitan areas have seen home purchases increase twice as much as the densest, according to the American Enterprise Institute’s Housing Center. This trend holds for many of the major industrial clusters in San Francisco, New York, Los Angeles, and Seattle.

Meanwhile, large tech companies forced to deal with remote work have discovered that, at least in the short run, it works tolerably well. Rather than deal with continued reopening uncertainty as the virus rages on, companies like Facebook, Twitter, Shopify, and Quora have allowed most or all of their employees to work from home permanently. An exodus of engineers from Silicon Valley could prove beneficial to smaller communities in cheaper parts of the country—but could slow the kind of innovation that happens when talented people work in close proximity.

The physical isolation of employees will hamper the development of groundbreaking ideas within individual firms. It could also decrease the number of spillover opportunities that can arise in new firms. The proverbial process in which two engineers meet in the office, start tossing around product ideas in their downtime, consult with a local venture capitalist to get advice, and leave to found a start-up will be severely diminished if all of these connections are mediated via Zoom. Videoconferencing is useful in maintaining existing relationships but a poor substitute for chance meetings with new colleagues. Even if remote work is beneficial on balance for a given tech company, it could be a net negative for the company’s larger industrial cluster and for the country.

In the past half century, America’s innovation engine—built on an influx of global brainpower, a vibrant university system, cities that encourage the spontaneous interaction of people and ideas—has worked so well that policymakers have taken it for granted. Yet the pandemic is now disassembling that engine in remarkably precise ways.

The U.S. can still limit the damage. A reversal of President Trump’s immigration freeze would signal that America still wants highly skilled talent from abroad. A huge injection of research funds as suggested by the recent Endless Frontiers Act could help university research labs stay afloat.

In-person collaboration likely won’t resume until federal and state governments succeed in bringing the pandemic under control—something that many other countries have largely managed to do. When that happens, efforts to build more affordable housing in dense cities could attract people and companies back into productive clusters more quickly.

What Americans should not do is expect past economic momentum to carry the U.S. through the present crisis. Just as the coronavirus won’t go away on its own, the sources of economic innovation in the United States won’t just maintain themselves.

Caleb Watney is a resident fellow of technology and innovation at the R Street Institute.

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