Captioning sponsored by wpbt this is n. B. R. Susie good evening, everyone. Im susie gharib. Tonight, a special look at innovation and competitiveness in america. We introduce you to watson, the i. B. M. Super computer thats leading u. S. Innovation into the future. Tom good evening. Im tom hudson. We also meet some smaller all American Businesses surviving and thriving as the global marketplace gets more competitive. Susie we have that and more tonight on n. B. R. Tom innovation and competitiveness. These two words attract a lot of attention by investors, Business Leaders and politicians as the u. S. Worries about its status as a Global Economic leader. America has a long history as the worlds leading innovator, but what will it take to remain competitive and remain a beacon of innovation . With the markets closed for the Martin Luther king, jr. , holiday, we bring you this n. B. R. Special edition. Tonight, we begin with a look at American Innovation today. Suzanne pratt has the story. Reporter the u. S. Has put the world behind the wheel and an iphone in millions of pockets, but we may be losing our competitive edge. Some say its because americas fragile economy is a distraction for corporate america. Others point to our inferior infrastructure and subpar public education. But adam segal, author of advantage, says the big problem is others are gaining ground. We have been kind of running in place for the last three or four years because of the recession, spending on r d, and big ideas seem to be fairly scarce while china just continues to funnel more and more money into it. Reporter still many argue the u. S. Will always be extremely competitive because we are t most innovative country in the world. What better place to witness innovation at work than at i. B. M. In westchester county, new york. This is the home of watson, big blues super computer. Watson was clever enough to beat jeopardy champions at their own game just a few years ago. Now, i. B. M. Researchers are working on new uses for the brainiac computer, particularly in the field of medicine. Bernie meyerson calls himself i. B. M. s head geek. He says innovation is critical for companies and societies to survive and thrive. And yes, there is a magic ingredient. Continuity. In the down cycles of the economy, the temptation is always, well, well just cut the front end, we wont do our research, were not going to work on development. So you empty the pipe. Then, when the economy turns and it always turns when that economy turns, you have nothing in the pipe, and people run you over out of the gate. Reporter but, not all innovation happens in multibilliondollar labs. Here in manhattans fashion district, www. Ilikewhatyourewearing. Com is trying to ignite a fashion revolution. Started by olivia gossett, the web site sells cutting edge clothing by rising designers, but its also an online magazine, one that uses cute articles to sell products and foster those independent designers. I think were opening up gateways in the industry for other people that otherwise wouldnt have a chance to make a name for themselves. You know, you see the same dress on four different web sites for four different prices from the same label, and youre left kind of wondering, isnt their more out there . Reporter ilwyw. Com may not help cure cancer, but it might create jobs. And its part of a push by new york citys borough president , scott stringer, to make the big apple a destination for start ups, what he calls the innovation economy. How we take advantage of it will define the economic success of this city at a very interesting time in our history, after 9 11, post hurricane, dealing with infrastructure challenges and budget deficits. And we need to expand our tax base, and we need to take advantage of whats happening right now. Reporter exactly how we take advantage is ripe for debate, but most agree better education and visas for the scientists we train in the u. S. Is a good start. And remember what i. B. M. s myerson said about continuity its just as important to a the moment you believe there is no danger of losing your edge is when it disappears on you. Reporter suzanne pratt, n. B. R. , athe Watson Research center. Susie the u. S. Needs to make structural changes to restore its competitiveness. Thats the main conclusion of an extensive study on american competitiveness by Harvard BusinessSchool Professor michael porter. When i talked with him, we began our conversation by discussing why competitiveness matters for the u. S. Economy. Competitiveness is the coexistence of two things one is a Business Environment in the United States that allows Companies Based here to compete successfully in thelobal economy but while maintaining or improving the standard of living of americans. We have to do those two things together to be truly competitive. If business is succeeding by cutting wages, thats a sign were not competitive. So competitiveness is fundamental not only to companies and business but also really to the future prosperity of american citizens. Susie michael, people say that in order for the u. S. To be competitive it has to be a center for innovation. By that definition, how are we doing . Well, i think the u. S. Actually remains a tremendous juggernaut in terms of innovation. If you look at r d speing in the entire world, we account for by far the largest share of r d spending. We continue to be a major source of patenting and new companies. But the problem is not so much today innovation, the problem is that our Business Environment has got sufficiently inefficient and high cost and cumbersome that were not able to capture the fruits of innovation. Too much of the innovative activity generates Manufacturing Activity outside of the United States. Apple is a gate example. Apple until recently is not going to make anything in the u. S. , despite the fact that theyre a tremendous juggernaut of innovation. So innovation is something we need to keep worrying about, we need to keep renewing it and improving it but ultimately thats not the central problem holding us back right now. Susie all right. Well, so, to encourage more innovation and to restore competitiveness, what does the u. S. Immediate to do . What would you say are the one or two key things we need to do to restore comtitiveness . Number one, we have to open up t immigration of highskilled individuals to america again. Starting with the graduates of our own universities and our own ph. D. Program which is were now forcing a lot of these talented people who li who actually want to stay in america. Secondly, we have to reform our Corporate Tax code. We have allowed our Corporate Tax rate to become the highest in the o. E. C. D. Other countries will be bringing theirs down, we have been letting ours creep up. Our tax code is enormously inefficient, its riddled with exceptions and loopholes. Were collecting very limited Corporate Taxes. I think there is a wide consensus we have to reform this tax code. That will have a tremendous impact on how Companies Think about investing in the u. S. If we can do those two things we would really change the trajectory and sense of optimism in the u. S. Economy almost overnight. Susie given the intense drama between washington lawmakers and the business community, how do we make these changes come about. Whats happening in washington is were just not discussing the things that really matter for the future trajectory of our american economy. Were just not able to reach consensus now to get things done. This, i believe, is our central challenge right now. Its not the opportunity to be successful, its not the potential of this country, its really this gridlock that we have in our society right now which is deeply concerning. Susie despite the issues that you bring up and despite the obstacles, youre hopeful and optimistic about americas future prospects. So if five, ten years from now we were to ask the question how is america doing in terms of its competitiveness, how do you think were going to be doing . What are we going to say about the u. S. . Well, we have the most precious strengths in the u. S. That matter the most innovation, a university system, entrepreneurship, a Great Dynamic country, a Great Dynamic group of citizens. The things that we have to fix are the basics. Theyre not hard, theyre not rocket science, but we just have to achieve consensus. My optimism comes from the fact that historically america has been willing to face the hard problems, be dynamic, change things, not get stuck in gridlock. Right now its unsettling how unabler two make progress. But i think theres an underlying optimism i have that just because of the very historical nature of this country and certainly theres no reason why we cant be competitive. You know, its really going to be our choice in terms of how we behave, what kind of policies we set, how we Work Together between business and government and, you know, im optimistic that well sort it out but, boy, it sure looks ugly right now. Susie for more on michaelportiers research and articles go to nbr. Com and check out our partnership with some of the nations top Business Schools like harvard. Tom while beer wasnt invented in america, u. S. Brewers are thinking small to make it big. Small craft brewers are claiming a bigger stake of the industrys annual 300 billion in sales. Mike hegedus takes us to one small regional brewer on the verge of going national. Reporter it is the face of success illuminated by a welders torch, a german engineered expansion assembled with bavarian precision. A 10 million project to increase production of roll out the barrels, baby, its beer this is the Lagunitas Brewing Company operation in petaluma, california, on the edge of bucolic Sonoma County pasture land. Lagunitas, with 150 employees, is in the sweet spot of the u. S. Beer industry. Sales by small, regional craft brewers making up for sagging National Brand sales. Its about people who are alternative thinkers, who just are looking for their own experiences in life. They dont want to be fed from a tv commercial what it is they want to put in their bodies. Beer is one of those ancient personal relationships people will have. This over here, this is malt that comes from alberta, canada. This is the base for making beer. If this were wine, these are grapes that wed squeeze. Reporter tony magee is the c. E. O. Of lagunitas. Formerly in commercial printing, he started the brand in 1994, made a little home brew and was hooked. Today, so are a lot of other people. Lagunitas, the name of the small nearby town where magee lived, has a cult of personality that includes brews like harry eyeball i. P. A. , cappuccino stout and brown shugga. It does just short of 40 million in sales, will produce close to 240,000 barrels of beer in 2012, and be available in all 50 states by the end of the summer, a summer that will see bands playing at its brewery based performance venue. What you find is that every Craft Brewery has its own unique culture, and its almost, like, a giant family. Reporter Jeremy Marshall is the head brewer, a job that will get a lot bigger soon. By the fall of 2013, this petaluma expansion will be matched by a bigger project a second lagunitas brewery in chicago, employing about 100. It will jump the company from being the 17th largest craft brewer in the u. S. To number two, right behind boston brewing and sam adams. 14 times a week, a semitruck leaves loaded with beer, headed for either denver, chicago, new york, maine. And so, now, instead of that beer leaving in trucks, itll leave from chicago. So the difference in freight times 14 trucks, times 52 weeks, covers the debt service on the entire brewery twice over. This is New Territory right now, the idea that, you know, you can grow and keep your soul. If anybody can pull it off, we can. Reporter the Lagunitas Brewing Company, a little sumpin wild for everybody. In the evening, i know that while im going to bed, there are hundreds and hundreds of these all around the country. People are having communion with our business right then and there, taking it into their body. What other product besides maybe a cigarette or a communion wafer besides a beer, sight unseen, will you just take right in, you know . So, to that. Reporter indeed. Mike hegedus, n. B. R. , petaluma, california. Tom for many everyday products made in the u. S. Has been replaced with we signed in the u. S. Taken ls ipad devices. Apple makes the declaration part of its marking, part of its packaging right there. Apples devices proudly acknowledged th disnction saying designed in california while they asset are are built in china. Peter morici is the former chief economist at u. S. International trade commission, he joins us from washington, d. C peter, how does export egg innovation impact our economy here in the states . We lose a lot of the good manufacturing jobs. Although engineering jobs pay well, manufacturing did pay well in the United States. Also, the process of making products is very important when you have a paradigm shift. Great example years ago kodak decided to specialize in film and sent camera making to the far east. Then their labs developed a digital camera and they forgot how to make them. In the sense that they lost the ability to manufacture shutters, lenses, things like that. And they missed out on the revolution in cameras, naoko tkabg is virtually out of business. Reporter doesnt this movement, this exportation of free innovation free up capital for higher more margin investment here in the states . Actually not. Essentially, the American Capital leaves for china. Pital is fungle, movable, americans haveless capital to work with because of it. Tom how does American Innovation impact countries using it . In china, for instance, you can see a developing middleclass and perhaps more American Products going over to china. Absolutely. And what you see in korea dawes because thats a good intermediate step is now theyre getting dominance in cell phones. First they manufacture, then they develop the engineering that supports the manufacturing, then testify T Product Development and before you know it youve lost your industry. Tom you wouldnt advocate barriers that would keep the kind of innovation tail that youre speaking about here in the states . What i do advocate is ensuring that American Manufacturing has the same advantages as chinese manufacturing. We dont really provide enough incentives for it here and as a consequence its very easy to leave. Whether youre making the chips or the phones its just more stranges you to be in china these days. You can get things done faster and the got will subsidize you. In the United States the regulatory burdens are real, substantial, and burdensome. Tom well, the big the big ability to move business over the china has been, of course, the currency peg that the chinese currency has against the u. S. Dollar and the value that that enjoys. Certainly that couldnt be a case for the u. S. Dollar, could it . Well, its sure a case for doing something about the chinese ewe wan. The undervalued currency gives chinese manufacturers a 40 advantage. Its tough to compete with that. Thats important. Also you need to set up a factory in china with 3,000 people in 90 days. I would suggest it would take abou three yea here because of l e hos you hav to jump through. No tom you talk about that case in point with kodak and how it moved some of its operations overseas and developed a digital camera but missed out on the digital camera revolution. What is your outlook for American Innovation. Certainly the movement of innovation hasnt stifled creativity for u. S. Corporations. This manufacturing abroad has taken design and engineering abroad with it. Look at the cell phone revolution. Initially it was a canadian and american phenomena, blackberry and iphone. Now samsung increasingly is leading. And you c lose whole industries that way. Other industries the batteries in cars, the manufacturing of the cells. Thats something thats coming to be dominated by the asians. Hybrid vehicles and so forth. Theres a reason those things didnt happen first in the United States. Tom American Innovation and competition around the world. Peter morici with us, hes with the university of maryland. Thank you professor. Take care. Susie selling the holidays to the world. Mike hegedus found a company thats thriving despite intense competition from outside the United States, and also making its signature products right here in america. For the barrango corporation, every day is christmas. Reporter you wouldnt know it, but what youre watching is American Ingenuity on display for the whole world, a blueprint to recovery for u. S. Manufacturing. Actually, its only in guatemala city, but it was conceived, designed and made in america. The Worlds LargestChristmas Tree 8,300 branches, over 1. 5 million l. E. D. Lights, all timed to music driven by computers. Housed in a semitrailer inside the 57 foot base. A world class tourist attraction worth millions to the Central American beer company that paid for it. Its logo sits right up there on top. Basically, think of this Christmas Tree as the bellagio water fountain up on a Christmas Tree. We do not keep stock. Macys will come in and say, we want a bunch of elves, but we dont want them dressed this way. Reporter nick barrango is the Technology Expert at barrango corporation of south San Francisco, california, a preeminent player in the 2 billionayear visual merchandising business. We create props, decorations, displays for stores, shopping malls, amusement parks, any commercial properties. Reporter this all started right after the San Francisco earthquake. A newlyarrived italian immigrant named barrango, a sculptor by trade, started making mannequins, the most lifelike anyone had ever seen. But it turns out the real gold was in holiday displays, and, for over 100 years, barrango has been manufacturing them and classic carosels for retailers around the country and the world, from boston to burbank, from berlin to beijing. Yes, they ship to china, but they dont make it there. Weve had the opportunity to go to china and have things manufactured, but were a quality, handson family, company, and we need it to be in america in order to produce what weve got. We cant just turn it over to production in another country. Reporter it is that quality first mantra, along with its global reachthat squired barran through the recent downturn. That, and agility in the marketplace using the internet as a sales tool and technology to drive new products. A new take on an old product, where the lights are all computercontrolled and synchronized to christmas music. Reporter an american domestic manufacturer embracing technology, selling globally, with quality at its core. Ho, ho, ho. Mike hegedus, n. B. R. , south San Francisco, california. Tom making an innovation from an idea to a business takes investment, time, expertise and money. Jeremy levine is a partner at bessemer venture partners, a Venture Capital firm. With us at the nasdaq in new york. Jeremy, you work with Young Companies across the globe. How does American Innovation stack up against its International Competitors . I think its the best in the world. In fact, i think theres no comparison. The number of Big Companies that have emerged in the very recent hioryn arica just dominates that of any other country and i think thats evidence that American Innovation is as strong as its ever been. Tom what are the ingredients, though, that you see necessary for that fertile innovation economy to be sustained over the next several years if not the next generation or so . Well, in many ways its easy. Its almost selfreinforcing. The basic idea is that as companies go from nothing or startups to Larger Enterprises the many people who become part of that success get inspired by the leaders, orhe founders, and some subset of them decide to go start their own companies. So the more success you see in the innovation economy the more success theyll get. Other countries dont have that benefit because they have many fewer examples that they can look to. Thats americas advantage. Tom theres been some criticism we dont see new big break throughs like we had during the Industrial Revolution or the information revolution. Were seeing more application of technology as opposed to new technology being innovated. Yeah. I think on some level its a fair criticism. My own firm dates back to the success of carnegie steel and one of the fouers of rnegie steel essentially founded our group to invest in additional innovative companies. And back then the development of Steel Manufacturing at scale enabled the creation of all sorts of things from metal which was fundamental and i suppose on some level we dont see that today. On the other hand, there are many sort of scientific or technical breakthroughs that contribute to applications as people learn to use them over time. Facebook as an example isnt particularly technically innovative but it le regs all the Computing Power and data storage capability that had evolved from a numberof scientific break throughs overtime. So i think its fair to say that, you know, applications are less obviously innovative than a fundamental breakthrough but just as important. Tom give us an idea of an industry you think is poised for some of that breakthrough innovation. Be it either transformative or application. I think one of the areas were most excited as as investors is watching Software Innovations that have been applied to Large Companies for decades now increasingly to consumers to all these new easytouse and access applications and that will spread to another set of constituents, nely Small Businesses. They have been left behind in many ways. They havent been able to access this stuff, its either too expensive or not tailored for them. Youll see a wave of Companies Applying ideas to help Small Businesses get more efficient andin access these new tools. Tom a positive reinforcement psychle with Jeremy Levine partner at bessemer venture partners. Susie for some final thoughts on American Business and innovation, heres harry lin. Hes executiveinresidence at idealab, a Technology Incubator in pasadena, california. Its fashionable in some business circles to criticize a lot of what passes for innovation these days as snake oil. After all, collateralized debt obligations were a financial innovation, and look what thats brought us. In the tech world, a lot of what gets touted as innovation mobile phone apps that let you find cheap beer or audio headphones that cost 300 bucks because theyve got a celebritys name on them may be clever, but theyre hardly the stuff that made Thomas Edison and the Wright Brothers legends. Still, when you look at the global picture of business innovation, a strong case can be made for americas continued dominance. We have our continuing appetite for risk and ventures and startups, something that other nations businesses lack. For the most part, we celebrate diversity, creativity and bushwhacking; not homogeneity, coloring within the lines, and repeating the sameold, same old. If theres a reason to temper this bullishness, though, its our tendency to focus more and more on shortterm gains rather than longterm sustainable growth. Amazon and apple are great examples of innovators that look past the next couple of quarters when they make their decisions. If more u. S. Businesses behaved that way, our seemingly Natural Inclination toward innovation stands a better chance at keeping us ahead. Im harry lin. Susie and thats nightly Business Report for monday, january 21, Martin Luther king, jr. Day. Have a great evening, everyone. And you, too, tom. Tom good night, susie. Well see you online at www. Nbr. Com and back here tomorrow night. Captioning sponsored by wpbt captioned by Media Access Group at wgbh access. Wgbh. Org