Let’s axiomatically presume that vertical integration (of your supply chain, manufacturing, software development, labor force, etc.) is the key to “innovation” in the abstract. You can see this starting to happen with BYD, the Chinese electric car company, for example.
With the above in mind, let’s say your goal as a country is to develop your industries so you can achieve broad vertical integration.
Soft economic assets (financial markets, legal structures, software, pharma, IP, etc.) are easier to bootstrap once you have hard economic assets assets (commodities, energy, manufacturing, transportation, logistics, etc.). If you lose your hard economic assets and only have soft ones, you are at a strategic disadvantage because your opponent (in this case China), can bootstrap their soft assets relatively quickly. By comparison, it will take you much longer to get your hard assets back (through the mythical process of “reshoring/reindustrialization”).
What makes you think the United States has lost hard economic assets? Also, have you considered that there are different types of innovations, that are affected by the structure of an economy and its research institutions?
The US has dominated radical innovations, China has excelled in incremental innovations. We're potentially throwing away our advantage in the former by decimating our research capacity (something conspicuously absent in your concept of what drives innovation), and there is no clear plan to take the necessary steps to rebuild our capacity in the latter.
The Pandemic exposed the reasons why pretty clearly. Having e.g. critical medicines manufactured by a geopolitical and military adversary is a very bad idea.
