Through those decades most companies insisted that their R&D programs-the foundation for product and process innovation-would remain in-house. This, too, is changing and rapidly. Michael E. Marks, CEO of Flextronics (Singapore), believes that Western tech conglomerates are on the cusp of a sweeping change in R&D analogous to the offshore shift of manufacturing. In the 1990s, companies like Flextronics "completely restructured the world's electronics manufacturing. Now we will completely restructure design," Marks said recently in Business Week.

In its recent report, "The Knowledge Economy: Is the United States Losing Its Competitive Edge" the Task Force on the Future of American Innovation (Washington) cites data that explain the principal shortcomings that contribute to the trend in outsourcing innovation. The report is worth your time; visit www.futureofinnovation.org.

First, government funding of R&D in the physical sciences, engineering and mathematics has fallen from 0.25 percent of GDP in 1970 to 0.16 percent in 2003. This research is crucial because it is the basis for the next generation of technology. Funding basic research is the role of the public sector, yet federal spending for basic R&D in engineering and the physical sciences has seen little or no growth in the last 30 years. By contrast, China, South Korea, Taiwan and India are all increasing gross R&D spending significantly.

Second, we are graduating fewer of the scientists, engineers and mathematicians who do the R&D that is the basis of innovation. The proportion of U.S. citizens in science and engineering graduate studies is declining. From 1994 to 2001, enrollment of U.S. citizens in these programs dropped by 10 percent, while enrollment of foreign-born students increased by 25 percent. In addition, the United States' share of science and engineering papers published worldwide fell from 38 percent in 1988 to 31 percent in 2001. While published papers generally do not have immediate commercial application, they show that skilled people are producing the knowledge needed for later applications.

The trend in outsourcing innovation has been slow and insidious, but it is increasing rapidly and the long-range implications are worrisome. The permanent R&D tax credit bill presently in Congress is necessary-albeit by no means sufficient-to maintaining the leadership in innovation that is crucial to American economic strength and national security.