Deep down Virginians, like Germans, know that R&D and innovation are key drivers of economic growth, essential elements of competitiveness and creators of jobs, not just in pure science, technology or engineering, but also in management, design, sales, marketing, accounting and dozens of other professions that are adapting and extending technology tools. So why in a campaign season that seems more parochial by the day are Virginians not demanding talk about the networks and the investments necessary to secure a leading position for their children, their businesses and their institutions in an innovation- driven future?

All the sound and fury about undocumented aliens, immigrants and foreign nationals, for example, has revealed that expanding police, jail and other enforcement services are the most expensive public services a locality could provide. What if the discussion, instead, were anchored in the importance of foreign nationals and Americans of foreign birth to our innovation economy (“The Ethnic Composition of U.S. Inventors” by William R. Kerr, Assistant Professor of Business Administration at Harvard University, 2007)?

“The contributions of immigrants to U.S. technology formation are staggering,” Kerr suggests. “While foreign-born account for just over 10% of the US working population they represent 25% of the US science and engineering workforce and nearly 50% of those with doctorates.”

Chinese and Indian ethnicities, in particular, are an integral and growing part of invention in the U.S. across all technology sectors – chemicals, computers and communications, drugs and medical, electrical and electronic, mechanical and others (including agriculture, textiles and furniture). Hispanic, Filipino and Korean contributions are growing, too, to Virginia’s advantage.

An economic development strategy for Virginia that recognizes and encourages those contributions in the Commonwealth would substitute a careful and measured response to immigration challenges for current chest-thumping. A more mature response from local officials might even increase the attractiveness of their technology parks, such as Innovation@Prince William. Cricket matches in new information technology center Lebanon, Virginia, for example, are turning out to be pretty entertaining.

Why does it matter? Virginia businesses know they are engaged in a global competition that demands global interoperability and products and services that meet global expectations and standards. For all its history, for example, the Internet is just now expanding to fully support addresses in alphabets other than those that use Latin or Roman characters. Where will that value be created? Could foreign nationals attracted to Internet-centric Virginia as a place to create or expand businesses to capture that value here?

Other researchers find that locations that invest wisely in knowledge workers and the infrastructure to support them can reap the greatest rewards (“Capturing Value in a Global Innovation Network: Comparing the iPOD and Notebook PCs” by Kenneth Kramer, Jason Dedrick and Greg Linden of the Personal Computer Industry Center at the University of California, Irvine, 2007). After comparing iPods and notebook PCs and the chips, storage, software and display technologies they share, the California team concludes, “The key distinction in who captures value is ... who defines the market and controls standards.” That would be Apple for iPod, Microsoft and Intel for PCs.

Researchers found that while the components, assembly, distribution and retail supply chains of the iPod and notebook PCs are very similar, the so-called value capture differs. For a $299 iPOD, for example, Japan supplies $27 of inputs, the US $7, Taiwan $4 and Korea $1. Unmeasured inputs and direct labor total $113. Distribution and retail costs add $75. Apple’s margin is $76. The value capture for a $1,400 HP notebook includes the US supplying $216 of inputs, Japan $81, Taiwan $23 and Korea $11. Unmeasured inputs and direct labor total $548. Distribution and retail add $350. HP’s margin totals $171.

“Where’s China,” the authors ask, “the production center?” It turns out that value added from final assembly in China equals only a few dollars of direct labor, less than five percent of final value. The real value creation and capture lies in the U.S. before and after production, including the profits that translate into value for shareholders, most of whom are in the U.S. American advances in core technologies, such as hard drive, flash memory, audio compression and battery life helped make that value possible. Innovation for iPod, in fact, meant creating a whole new ecosystem in which it can be used -- iTune software and stores, interfaces with vehicles and other systems, even content agreements (such as the just concluded Apple-Apple Records deal that will bring George Harrison’s work within downloadable reach).

Companies, therefore, the authors suggest, need to consider not only how much to invest and where to focus that investment, but also how to leverage global networks and how to capture value. Locations, such as Virginia (even Prince William), need to proceed from facts, not myths or fears, in formulating economic strategies to capture more value. Locations need to prepare their people to compete globally, not attempt to shield them from competition, and to create an environment that encourages entrepreneurs and uses a dynamic market to accelerate innovation.

But there is too little public discussion in Virginia’s election campaign of even small steps toward meeting these challenges. Information Technology and Innovation Foundation (ITIF) head Robert Atkinson, for example, is arguing anew that now is the time to make the federal R&D tax credit much more robust (“Expanding the R&D tax credit to drive innovation, competitiveness and prosperity” by Robert D. Atkinson, Information Technology and Innovation Foundation, 2007). The U.S. needs both more direct public investment and more competitive indirect tax incentives, suggests Atkinson, to meet competitive pressures from a growing number of other countries intent on anchoring the private-sector-driven global research enterprise in their countries.

The U.S. R&D tax credit that was the most generous among developed nations when President Ronald Reagan signed legislation creating it in 1981, now is not nearly as generous as the incentives offered in Canada, Australia, France or other countries. “Qualified research expenses” in excess of a specified base amount eligible for a 20 percent tax credit (reduced to an effective rate of 13 percent because expensing of research costs is reduced by the amount of the credit taken) sounds like one big caveat.

The U.S. is now 15th, at best, in tax generosity to R&D.

Atkinson argues that there is no question that the R&D tax credit stimulates research by correcting a market failure that keeps private firms from capturing all the benefits of corporate research. Private firms, therefore, tend to under invest in research. Other advantages of the credit include diversity in project selection, because many private firms make the choices, and relatively low compliance costs.

Atkinson’s suggestions for important changes in tax policy at the federal level, such as doubling the current value of the credit, modifying the alternative simplified credit and expanding the so-called flat credit for collaborative R&D, also could work in Virginia. Why not have the broadest definition of qualified research expenses, waive specific base amounts and make a state R&D tax credit the most generous among technology states? Why not encourage more R&D from firms already here and jack up the Commonwealth’s competitive position to induce firms to move R&D operations here?

A state R&D tax credit could combine with other policies to make Virginia the most attractive place for the smartest people, the most respectful place for a diverse population and the place where the most innovative and mutually supportive public, private and university partnerships can thrive. All Virginians could raise a glass of exhaust to that. We should talk.