The US turned its back on corporate labs. Gulf states must not make the same mistake

The Gulf countries are aware of the need to improve innovation as they prepare for the post-oil world. However, in seeking to emulate the knowledge ecosystem of the world’s most innovative country, the US, they risk repeating American businesses’ erroneous decision to dismantle their corporate labs, something caused by the growth of venture capital. Learning from this mistake will be critical to successfully transitioning to a knowledge economy.

Throughout history, there have been many innovative societies, but nothing comes close to the performance shown by the US economy from the end of the 19th century to the present day. The contributions of giants such as Samuel Morse, Alexander Graham Bell, Orville and Wilbur Wright, Henry Ford, Philo Farnsworth, Steve Jobs and Elon Musk continue to affect our lives in innumerable ways. By maintaining the best higher education system in the world, America’s conveyor belt of talent remains strong, confirming its status as the model that emerging economies seek to emulate when they want to boost innovation.

This desire to replicate the drivers of US innovation can be seen in many of the Gulf countries’ economic policies: establishing excellent universities; building knowledge clusters that link inventors with businesses; as well as offering exceptional expatriates long-term residency.

However, despite its continuing supremacy, cracks have begun to show in America’s innovation ecosystem. It is not just a case of other countries catching up – even taken in isolation, the US does not seem to be producing path-breaking discoveries at the breathtaking pace seen during the middle of the 20th century. Fortunately, due to its academic excellence and intellectual openness, the US has been able to study its weaknesses in real time, and it would be prudent for other countries to monitor this emerging literature.

One such contribution is a fascinating article published in the Issues in Science and Technology journal last year by technology experts John Paschkewitz and Dan Patt. Both authors used to work in the US government’s Defence Advanced Research Projects Agency, giving them profound insights regarding the underpinnings of success in the American innovation ecosystem. Among the many factors they cited for the recent decline in performance was the gradual extinction of American corporate labs.

Paschkewitz and Patt single out diffusion as being one of the key multipliers of innovation in a vibrant modern economy. Though an invention usually starts off in a quite narrow silo linking the applied researchers to the associated commercial venture, things really take off when other businesses become aware of the innovation and start emulating and modifying it. The speed of this diffusion is maximised by two elements.

The first is putting lots of applied interdisciplinary researchers in the same place and making them collaborate, helping them break out of the esoteric sub-fields that they inadvertently siloed themselves into at modern universities. The second is to have businesses develop innovations where the belief is that competitors viewing, modifying and upgrading those innovations is a source of further commercial success for the original innovator, rather than a threat to the corporate bottom line.

This is the mindset that led to the establishment and flourishing of 20th century corporate laboratories such as IBM Research Labs and Bell Labs. They spawned exceptional innovations including the transistor, the laser and the photovoltaic cell, all of which are at the heart of many 21st century innovations. Many of these inventions lay well outside the bounds of the sort of incremental innovation that modern research and development tends to emphasise, and they relied on an environment of open innovation unencumbered by corporate suits anxiously reading share price updates on their smartphones.

Unfortunately, Paschkewitz and Patt confirm the decline of the corporate lab, despite the continued growth in aggregate R&D expenditure. The increasing importance of venture capital in the financial landscape has led to more myopic corporate decision-making in general. In the case of R&D, this has led to a fixation on projects that yield quick returns (three to five years), with little encouragement for the sort of blue-sky thinking that yielded the transformational innovations of Bell Labs and others. Moreover, the mentality has switched from embracing technological openness as a vehicle for innovation to favouring technologies that create consumer lock-in, and that are fortified by constricting patents designed to limit diffusion.

The US political system has become dysfunctional and introduces reforms at an anaemic pace, in contrast to the remarkable agility demonstrated by Gulf governments of late, most notably Saudi Arabia and the UAE. Accordingly, the Gulf countries should not wait for America’s lethargic institutions to work out that they need less venture capital and more dynamic corporate labs, as well as less short-term thinking and more diffusion of new technologies. If the Gulf countries want to realise their ambitious targets, they need to absorb the observations of leading experts such as Paschkewitz and Patt and introduce the necessary reforms.

The purported design of Neom – official information remains limited – suggests that Saudi Arabia appears to be on the right track, as it seems to emphasise the kind of open innovation that used to be embodied by US corporate labs in the middle of the 20th century. Nevertheless, this model cannot be restricted to one monolithic city because true innovation powerhouses boast several geographically disparate centres of excellence.

At the end of the 20th century, when the Gulf economies were still highly reliant on oil, and the US was the unquestioned economic hegemon, it would have been unthinkable for the Gulf countries to learn from the America’s errors quicker than the Americans themselves, and potentially leap-frog it technologically. However, times have changed, and that unimaginable opportunity has materialised a lot quicker than anyone expected. Seizing it requires the Gulf countries to pay as much attention to what the US does badly in innovation to what it does well. Or, as the American author Gina Greenlee once quipped: “Experience is a master teacher, even when it’s not our own.”