Slowing R&D spending may hurt long-term recovery

If you seek more evidence for the decline and fall of the U.S. economy, Pfizer Inc. is furnishing it.

The huge pharmaceutical company has been slashing its research and development spending and eliminating thousands of jobs. Last week John Mattina, Pfizer's former R&D chief, questioned the strategy, telling Reuters: "If you don't have new products, you don't have a business anymore."

That might be the grim diagnosis not just for Pfizer but for America Inc.

The federal government, under pressure to balance the budget, has been cutting research spending for decades. Companies including Hewlett-Packard and Xerox have also reduced R&D spending, which boosts profits in the short term but could harm them in the long term.

Innovation may be the only way the United States can escape this terrible economic slump and thrive again. Wealthy countries such as America must innovate, inventing and selling high-value products to pay for our standard of living — or else compete with China and Mexico to be the bargain-basement vendor. Innovation doesn't happen without R&D spending that's both smart and substantial.

Is the Pfizer phenomenon a metaphor for the country? Is the downturn perpetuating itself by killing the seeds of recovery?

I asked the three smartest innovation authorities I know. Two were surprisingly optimistic, noting that the United States is still one of the biggest research spenders in the world. The kind of health care and biotech development in which Maryland specializes remains one of the country's best hopes for economic leadership, they said.

In the country that invented the telephone, the transistor and the Internet, the experts said, innovation and entrepreneurialism may hide in unexpected places.

"Right now you've got to say that the rate of innovation has slowed," at least in the official statistics, says Louis Galambos, an economic historian at The Johns Hopkins University who has written numerous books on information and pharmaceutical technology.

However, he said: "I continue to be very optimistic because of small and medium-sized firms. It seems to me that in those areas, which may not be where people are looking, and which don't make headlines, you've got continued pressure for innovation.

"It doesn't just come out of the R&D laboratories" from huge companies like Hewlett-Packard, he added.

"That's the classic style," he said. "But we've still got a very healthy process of new-firm creation, and that's where you need to look."

For example, in the fiscal year that ended in June, Hopkins professors turned in more than 400 ideas for potential commercialization, says Aris Melissaratos, the university's senior advisor for technology development and the co-author of "Innovation: The Key to Prosperity." That's up from less than half that amount a few years ago.

Hopkins' patents, incorporations and technology fees in the form of licensures and royalties have all risen substantially. One of the university's best-known startups is Rockville-based Amplimmune, which is working on cancer vaccines and which signed a multimillion-dollar alliance last year with GlaxoSmithKline.

But Melissaratos, too, worries about the R&D slowdown in government and big industry, especially at the National Institutes of Health, which furnishes Hopkins with hundreds of millions of dollars in annual research grants. Some of the cost-cutting proposals offered in Washington include substantial cuts in health care research.

"You hear the president talking about sustaining the research investment," Melissaratos says. "If they do not there's no hope of getting out of this recession."

Two years ago Michael Mandel, then chief economist for Business Week magazine, wrote a cover story titled "The Failed Promise of Innovation in the U.S." The piece blamed the lack of technology breakthroughs over the last decade as a factor in the 2008 financial collapse.

I asked Mandel, now chief economic strategist for the Progressive Policy Institute in Washington, whether the problem is getting worse.

"I've grown very worried about the effect of regulation on innovation," he says via email.

He has criticized President Barack Obama for focusing on clean energy innovation, an area in which the United States has little competitive edge, while giving short shrift to biomedical research, an area where it does. He thinks the Food and Drug Administration may be impeding innovation by erecting needless barriers to approval for drugs and medical devices.

He proposes a "regulatory improvement commission" similar to the base-realignment commissions that closed unnecessary military installations.

It's hard to get regulation right. As Mandel agrees, it was under-regulation in financial services that helped create the mortgage disaster.

It may be that the rules in some cases are too severe. But if we're not investing in R&D in the first place, the weakest regulations in the world won't help.

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