America has been a top global innovator for decades. Its groundbreaking inventions have reshaped modern life at home and abroad.

Just look at the Internet—one of the world’s most life-changing innovations.

It started off as a Cold War project by the U.S. Defense Advanced Research Projects Agency (“DARPA”). The goal was to create a resilient communication network that could survive enemy attacks.

In the 1960s, researchers developed the Internet precursor ARPANET, an academic network that allowed computers to share information.

About 20 years later, this network expanded to include more institutions and gradually evolved into the modern-day Internet. By the 1990s, the technology was released for public use.

Today, the Internet powers the digital economy. It generates trillions of dollars in revenue, supports millions of jobs, and enables instant connectivity worldwide.

All of this resulted from tremendous amounts of labor, research, and funding—the foundation of American innovation.

Productivity has been driving economic dominance for decades and U.S. workers are the most productive in the world.

This year, the average American laborer is expected to generate about $171,000 worth of economic output. That’s well above the output in other advanced economies.

Workers in the eurozone, the United Kingdom, and Japan are expected to produce the equivalent of $120,000, $118,000, and $96,000, respectively, in 2024.

Since 1990, U.S. worker productivity has surged 73%. It has outpaced all other major economies, fueling solid economic growth for decades.

The bottom line is a skilled and dedicated workforce is crucial for U.S. innovation. That’s a big reason why America leads the world in research and development (R&D).

R&D involves exploring new ideas, technologies, and processes through research and experimentation.

Today, the U.S. allocates 3.5% of its total GDP to R&D. That’s roughly $960 billion per year. We can see this investment in the capitalized R&D of U.S. companies.

In our Uniform Accounting approach, we treat R&D like an investment, not an expense. That helps us calculate how much firms are investing in innovation over time.

Among S&P 1500 Index companies, which cover most sectors of the U.S. economy, capitalized R&D has more than quadrupled since 2004.

Between 2022 and 2023, it rose 10% and from $2.5 trillion to nearly $2.8 trillion. Take a look…

U.S. companies are consistently investing in R&D across a variety of sectors while also raking in profits.

Thanks to their focus on innovation, the average Uniform return on assets (“ROA”) of U.S. firms is an impressive 12%—higher than most other major economies.

It’s also worth noting that the public sector plays a big role in U.S. innovation.

As we mentioned earlier, DARPA was a key part of the development of the Internet. Without its funding, the Internet would have been delayed by at least a decade.

DARPA is still plowing billions of dollars into new technology today. It has pledged more than $800 million to improve semiconductors and $2 billion to further develop artificial intelligence technology.

Federal legislation, like the Infrastructure Investment and Jobs Act and the CHIPS and Science Act, are also driving innovation, speeding up domestic manufacturing for in-demand products like advanced chips.

In short, public-sector funding provides strong incentives for organizations to develop new technology and all these factors make up America’s distinct competitive edge.

The U.S. has built a strong reputation for cutting-edge innovations. After all, it has delivered them for decades.

It consistently outperforms the global competition in worker productivity, R&D investing, and government funding—the key drivers of ingenuity and economic growth.

On top of that, U.S. companies have remained some of the most profitable businesses in the world.

As long as this flywheel remains in place, our economy should stay at the top of the global hierarchy for decades to come.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

To see our best macro insights, become an FA Alpha and get access to FA Alpha Pulse.