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Investing In Knowledge Economy Will Help Make 21st Century Another ‘American Century’

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Time publisher Henry Luce first used the term “The American Century” in a piece written in 1941 that urged the United States to forsake isolationism in favor of entering World II and defending global democracy. The concomitant global supremacy of both the U.S. industrial sector and the country’s military might achieved by the end of the war proved Luce to be prophetic.

After the war, industrial hubs in places like Detroit, Cleveland, Peoria and Pittsburgh propelled the country to become the world’s most powerful economy and paved the way for the development of new technologies that have become central to every aspect of our lives today.

But even as the U.S.’s geopolitical status was in ascension during the 1990s, the country’s competitiveness in the global marketplace had begun to wane. Since then, manufacturing operations and millions of blue-collar jobs have moved to places like Mexico and China, and countries throughout Asia have caught up with Silicon Valley’s tech wizards in many areas. And as the so-called knowledge economy has become globalized, firms with production facilities that remain in the U.S. often find themselves losing out to foreign competitors from Beijing to Bengaluru.

For the U.S. to remain competitive and continue to be the globe’s dominant economy, policymakers need to rethink and reharness the power of the knowledge economy before its gravitational center also relocates beyond our shores. Investing in these intangible assets that comprise the knowledge economy will boost U.S. global competitiveness while also helping domestic firms remain competitive.

A recent study by McKinsey noted that companies in the top 10 percent for growth in gross value added (GVA), a measure of economic productivity, invest over two and a half times more in intangible assets than the bottom 50 percent of companies. The study also found that companies, sectors, and economies that invest the most in intangible assets – intellectual property (IP), research, technology, software, human capital, digital, managerial, and organizational capabilities – grow faster than those that are not.

For instance, this is evident in the development of the prosaic but vitally important enterprise software industry, which is the term for the software that companies use for payroll, billing, and myriad other business support activities that companies large and small have come to rely upon. Much of the early investment in this area came from private equity: For instance, Vista Equity Partners invested heavily in such companies, and its capital helped these companies grow rapidly while remaining in the U.S. These investments have made its chair, Robert F. Smith, the wealthiest African American in the country.

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Private equity can play a role in growing the U.S. knowledge economy and incubating new companies in this arena, but it’s also important that we do other things to incentivize the big tech companies to focus their hiring and investments in the U.S. Implementing a rational tax policy would be a good place to start, for instance.

Despite the promises and exhortations from some of our country’s political figures, manufacturing and blue-collar work in the U.S. will never return to what it was during its post-war heyday. In the coming years, the country faces a similar predicament with the tech and other knowledge-based industries unless we take steps to encourage domestic investment in these areas. Instead of letting this happen, we need to heed the advice of Winston Churchill, who presciently predicted in the midst of World War II that “the empires of the future are empires of the mind.”