Don't Stress the Tech

(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

Technological innovation leads to new products which can raise earnings and benefit stock prices. Many investors worry the US is losing its technological edge, especially as Emerging Markets like China increasingly contribute expertise. And truly, more research is going on around the globe than ever before. But global equity investors should be agnostic to where research is performed—they can benefit from innovation at home or abroad through acquisitions, foreign equity ownership, technology licensing, emulation, or even publicly funded projects.

Ideas generated in Asian labs, for example, may spur acquisitions from US firms which hold record levels of cash. US firms acquired 78 Chinese firms worth a total value of $3.5 billion in the first half of 2010.* A weak euro has US firms hunting Europe for attractive acquisitions. European tech entrepreneurship has plenty of potential currently. Likely we see more purchases like US networking giant Cisco's 2009 purchase of Tandberg ASA—a Norwegian maker of video conferencing solutions that looks ever more attractive to firms with employees flung across the globe. Norwegian engineers have innovative video conferencing technology, and Cisco can help bring it to customers—a great example of how even investors owning only US shares can benefit from innovation all over the globe. But if you are a fully global investor, it doesn't matter the domicile of the firm. Buying foreign stocks means you're covered whether US companies innovate, acquire foreign innovation, or none of the above.

That said, the US is still fertile ground for tech. One-third of global research and development spending is done in the US—that's a hefty portion for one country, and by far the most worldwide. The US also produces far more published research and patents than any other country. The US economy is exceedingly diverse, so it shouldn't surprise that our research covers natural sciences, engineering, medicine, biology, and social sciences. US innovation can come from academic or private labs, but it's certainly not limited to them. Over the years, great innovative leaps have also stemmed from defense laboratories—where public funding and private expertise meet.

Some skeptics note that most defense platforms benefit more from privately funded research rather than publicly funded. That may be true. For example the unmanned aerial vehicles that have proven so successful in Iraq and Afghanistan depend on the silicon-based computer processing power which was bankrolled and developed by private industry. Likewise, the military is turning to the National Football League to learn how to monitor and digest the massive volumes of video footage generated by those drones.

However, technology does also flow from publicly funded defense research into private markets in profound ways. For example, cell phones transmit human voices through space with the help of gallium arsenide circuits. Gallium arsenide know-how wouldn't be cost-effective today if the military hadn't spent decades developing it for use in mobile battlefield radios. You might have an iPod without gallium arsenide, but not an iPhone. The trade-off for many cutting-edge defense technologies is higher performance at a significantly higher cost. But clever engineers spend decades cutting costs, and some of these exotic semiconductors will eventually enable new commercial applications.

US defense contractor Northrop Grumman recently set a chip performance record with a variant of an exotic semiconductor known as indium phosphide—one of several advanced semiconductors vying to meet high-performance defense needs. The indium phosphide circuit clocked 670 gigahertz—2 times the prior speed record and over 100 times faster than commercially available chips! Older variants of indium phosphide are already used in niche commercial applications like medical lasers. The high-performance variant being developed by Northrop Grumman and others may eventually find its way into more complicated circuits used in spy satellites and advanced sensors used above the battlefield—or eventually other commercial application we can't yet envision.

Looking to the future, what surprises are in store for us? What may be possible when information is transferred and processed 100 times faster? Technology tends to incubate slowly and may even sometimes seem completely stagnant. But advances often leap forward in surprising jolts and from unexpected places—unlocking human ingenuity, economic potential, and investment opportunities. The most exciting innovations remain ahead of us.

* Bloomberg and Fisher Investments Research