Innovation measurement

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Innovation measurement

  1. 1. Innovation MeasurementTracking the State of Innovation in the American Economy A Report to the Secretary of Commerce by The Advisory Committee on Measuring Innovation in the 21st Century Economy January 2008
  2. 2. Innovation MeasurementTracking the State of Innovation in the American Economy A Report to the Secretary of Commerce by The Advisory Committee on Measuring Innovation in the 21st Century Economy January 2008
  3. 3. Innovation Measurement: Tracking the State of Innovation in the American Economy ADVISORY COMMITTEE MEMBERS CHAIR Carl Schramm President and CEO Ewing Marion Kauffman FoundationBUSINESS MEMBERS ACADEMIC MEMBERSSteve Ballmer Ashish AroraCEO Professor of Economics and Public PolicyMicrosoft Corporation H. John Heinz III School of Public Policy and ManagementDavid L. Bernd Carnegie Mellon UniversityCEOSentara Healthcare Rajesh Chandy James D. Watkins Professor of MarketingJames Blanchard Carlson School of ManagementRetired Chairman of the Board and CEO University of MinnesotaSynovus Financial Corp. Kathleen B. CooperGeorge Buckley Senior FellowCEO Tower Center for Political Studies3M Southern Methodist UniversityArt Collins Dale W. JorgensonFormer Chairman and CEO Professor of EconomicsMedtronic Harvard UniversityMichael Eskew Donald SiegelChairman and CEO Professor and Associate DeanUPS Graduate School of Management University of California at RiversideLuther Hodges, Jr.PresidentPhoenix Associates, Inc.John MenzerVice-ChairmanWal-Mart StoresSamuel J. PalmisanoChairman, President and CEOIBM Corporation
  4. 4. Innovation Measurement: Tracking the State of Innovation in the American Economy AcknowledgementsThe members of the Advisory Committee would like to acknowledge the contributions of those whohave assisted us in our task.We are very appreciative of the assistance we have received from U.S. Department of Commercepersonnel. We are particularly grateful for the work of Patricia Buckley, the Executive Director of theAdvisory Committee and a Senior Economic Advisor to Secretary Gutierrez, and E. R. Anderson,the Federal Designated Officer for the Advisory Committee and Deputy Under Secretary forEconomic Affairs.We have benefited greatly from the guidance of Cynthia A. Glassman, Under Secretary for EconomicAffairs, and appreciate the assistance we have received from her staff at the Department as we haveprepared this report.*We are also grateful for the support of the Department’s statistical agencies: the Census Bureau andthe Bureau of Economic Analysis.In addition, we wish to thank all those who submitted comments to us in response to our FederalRegister request. All of the submissions helped us greatly in thinking through our ideas andformulating our recommendations.* Particular thanks go to: Jane W. Molloy, David N. Beede, Sabrina L. Montes, Joseph V. Kennedy, Cassandra A. Ingram,Beethika S. Khan, Daniel D. Bachman, David K. Henry, Kemble Stokes, Jacque Mason, and Dar Davis.
  5. 5. Innovation Measurement: Tracking the State of Innovation in the American Economy Transmittal Letter from the CommitteeJanuary 2008The Honorable Carlos M. GutierrezSecretary of CommerceU.S. Department of CommerceWashington, DC 20230Dear Mr. Secretary:You charged this Committee with developing “new and improved measures of innovation” in three areas: howinnovation occurs in different sectors of the economy, how it is diffused across the economy, and how it affectseconomic growth. As chair of the Advisory Committee on Measuring Innovation in the 21st CenturyEconomy, I am pleased to present a report that is the culmination of nearly a year’s worth of study andconsideration by the members, and that we believe represents the most fundamental changes that can be madeto advance our understanding of innovation.While we recognize that the American economy is changing in fundamental ways—and that most of thischange relates directly to innovation—our understanding remains incomplete. Indeed, data collection andmeasurement, while seemingly mundane, loom large in understanding these changes. Policymakers, investors,executives, managers, consumers, and researchers require accurate and complete information in order to makeinformed decisions. The centrality of the need to advance innovation measurement cannot be understated.The difficult work of improving our measurement systems is only just beginning. On behalf of the Committee,I want to thank you for this opportunity, and I look forward to the improved information that will becomeavailable if the Committee’s recommendations are implemented.Sincerely yours,Carl J. SchrammChairAdvisory Committee on Measuring Innovation in the 21st Century Economy
  6. 6. Innovation Measurement: Tracking the State of Innovation in the American Economy Table of ContentsEXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiA Message from the Chair:WHY MEASURING INNOVATION MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xixChapter One:THE CURRENT STATE OF INNOVATION MEASUREMENTAND THE ESTABLISHMENT OF THE ADVISORY COMMITTEE . . . . . . . . . . . . . . . . . . . . 1Chapter Two:GUIDING PRINCIPLES FOR INNOVATION MEASUREMENT . . . . . . . . . . . . . . . . . . . . . . . 5Chapter Three:WHAT THE GOVERNMENT SHOULD DO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Chapter Four:HOW THE BUSINESS COMMUNITY CAN HELP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Chapter Five:WHERE RESEARCH IS NEEDED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
  7. 7. Innovation Measurement: Tracking the State of Innovation in the American Economy Executive Summary MEASURING INNOVATION AND ITS IMPACT ON THE ECONOMY the Committee. The Federal Register request andT he Advisory Committee on Measuring Innovation in the 21st Century Economy copies of all the comments received can be accessed was established by the Secretary of on the Advisory Committee’s web site atCommerce in September 2006 to recommend ways www.innovationmetrics.gov.to improve the measurement of innovation in theeconomy. In its report, the Advisory Committee The following set of principles was developed by theoutlines its recommendations to the Secretary of Advisory Committee to guide its own work:Commerce for steps to be taken by the government,the business community, and government and private I Innovation data collection efforts should buildsector researchers to foster and improve the on the way firms assess the effectiveness of theirmeasurement of innovation in the economy. innovative activities.The first act of the Advisory Committee was to I When developing better ways to quantifyestablish a definition of innovation that would innovation in the marketplace, considerationidentify what should be measured. The definition should be given to measuring the impact ofadopted by the Committee is: legislation and regulations on innovation. The design, invention, development and/or I Because of the nature of innovation and, in implementation of new or altered products, particular, the collaborative nature of the services, processes, systems, organizational innovative process, there needs to be tolerance structures, or business models for the purpose of of qualitative and subjective measures. creating new value for customers and financial returns for the firm. I Innovation measurement should not be static. Measurement is an iterative process that needsThe definition recognizes that the innovation to be to be treated less like a ‘project’ and moremeasured is more than simply something new; it has like an ongoing ‘dialogue.’ Learning andthe added component of adding value for both improvement are to be gained from each stagecustomers and firms. The definition also recognizes of the process.that innovation measurement needs to extendbeyond simply measuring inputs. While it is I Innovation measures should allow for analysisimportant to track inputs to innovation – such as at the establishment, firm, industry, country,research and development spending – that is not international, and, where possible,enough. Outcomes of innovative activity need to be regional levels.tracked and measured to determine fully the impactof innovation on the economy. I A conservative approach should be taken to any new data collection effort by recognizingAs part of its work, the Committee published a tradeoffs between costs and potential benefitsFederal Register request for public comments and and considering resource and regulatoryreceived many helpful responses. These comments constraints. The implementation of pilotwere extremely useful in informing both the guiding projects to gauge the costs and benefits of newprinciples and the recommendations adopted by data collection efforts is encouraged. To the i
  8. 8. Innovation Measurement: Tracking the State of Innovation in the American Economy extent possible, new innovation measures I Convene one or more workshops or forums should be able to be ‘back-tested’; that is, if under the auspices of the Secretary of applied to historical data, the measures should Commerce to discuss innovation drivers, produce the expected innovation relationship. impediments and enablers.The principles guided the work of the Advisory I Continue participation in the internationalCommittee and should also apply to implementation dialogue related to measuring and analyzingof the Committee’s recommendations. innovation and ensure that U.S. efforts are internationally compatible to theThe bulk of the Advisory Committee’s work was extent possible.devoted to developing recommendations to theSecretary of Commerce for actions to improve I Consider development of a nationalinnovation measurement. The recommendations innovation index when more work has beenendorsed by the Committee are summarized briefly done on both data collection and analysis ofbelow and appear in a more comprehensive list at the innovation drivers.end of this summary. All of the recommendations aredescribed in more detail in the body of the report. I Support funding necessary to implement the above recommendations.WHAT THE GOVERNMENT Most of the recommendations for government actionSHOULD DO build on existing programs or activities. These include the U.S. National Income and ProductTo achieve the long-term goal of measuring the Accounts (NIPAs) which constitute the officialimpact of innovation on the economy, the Advisory framework used by the Commerce Department’sCommittee recommends that the government create Bureau of Economic Analysis (BEA) to estimatea coordinated emphasis on innovation measurement. output, income and expenditure, trade, capitalThe effort will require structural refinements of formation, and wealth in the U.S. economy. Theexisting government data sets, the collection of new NIPAs were devised to help policymakers deal withand better data, improved linkages among statistical the severe economic fluctuations produced by theagency data sets, and expanded data Great Depression and World War II and have beensharing/synchronization authority. continually refined since then. The NIPAs now provide policymakers with an unrivaled ability toIn particular, the Advisory Committee recommends adjust policy quickly and appropriately in response tothat the government: short-term economic fluctuations. The NIPAs were not originally designed to measure innovation or I Create a stronger framework for identifying and delve into the causes of long-term productivity measuring innovation in the national economy. growth. Today, however, when policymakers are increasingly shifting attention from short-term I Better leverage existing data among the stabilization to long-term economic growth, changes statistical agencies to allow for the consistent to the NIPAs need to be made to accommodate this estimation of the contributions of innovation in new focus. the gross domestic product (GDP) and productivity accounts and to develop greater Refining the framework for measuring the understanding of innovation. performance of the national economy is an essential element in the government’s program to measure I Increase access to data in order to facilitate more innovation in the national economy and refine overall robust innovation research. economic measurement. These improvements will take time as there is considerable preliminary work to be done not only by BEA but also by the other ii
  9. 9. Innovation Measurement: Tracking the State of Innovation in the American Economystatistical agencies upon which BEA relies for data. The Advisory Committee recommends that theThe four major elements of this program are: Secretary support legislation to enable the statisticalintegrating industry-level estimates of total factor agencies to undertake expanded dataproductivity1 with the NIPAs; creating a sharing/synchronization activities. In particular,supplemental innovation account; improving service amending the law to expand access to IRS data tosector data; and improving the measurement of additional statistical agencies for the purposes ofintangibles. Work on each of these four elements has reconciling the business lists and designing morealready begun, although additional funding will be effective survey business frames would improve ourrequired to move forward. understanding of the U.S. economy.The Advisory Committee also recommends that the To encourage more research by non-governmentstatistical agencies pursue an agenda in support of the researchers, the Advisory Committee recommendsdevelopment of linkages between data sets both to that the government encourage innovation researchimprove data consistency and to provide a richer data by making public data more transparent through thebase for understanding and explaining innovation. use of data-tagging or similar methods of makingFull implementation of such an agenda would require data more user-friendly and by improving access tonew legislation. The statistical agencies are currently data through the creation of more public use datalimited in their authority to share data and that, in files. Such efforts are being undertaken currently byturn, affects data consistency. some agencies and the Committee encourages the expansion of such efforts. In addition, the AdvisoryLinkages between establishment-based data and firm- Committee also recommends the expansion of non-based data would be particularly useful for tracking government researcher access to confidential micro-and measuring innovation. Most U.S. industry data, including that on business dynamics, whilestatistics are estimated using establishment-level data maintaining high standards for confidentiality.as the basic ‘building blocks.’ Such statistics havebeen very useful for many purposes, as they combine A major issue raised by many of the Committeedata for establishments that do approximately the members was the need to examine innovation drivers,same things. However, many firms own or control impediments, and enablers. Since the issue wasmore than one establishment, and those outside the scope of the Committee’s mandate, it wasestablishments may be located in different geographic not fully explored. However, given the importance ofareas and may be producing different kinds of goods the topic, the Committee calls on the Secretary ofor performing different kinds of services, some of Commerce to convene one or more workshops orwhich, such as technology licensing transactions, may forums to examine innovation drivers, impedimentsbe of particular importance to the innovation and enablers.process. Reassembling establishment-level data intofirm-based statistics may lead to better innovation The Advisory Committee recognizes the importancemeasurements. Furthermore, firm- or establishment- of the international dialogue on innovation andlevel data from one data source can be augmented by recommends that it be continued and that efforts bematching them to corresponding data from other made to ensure that new innovation measures allowsources to obtain a more complete picture of for analysis across countries.innovation. All of these linked data are understoodbest when also matched over time to create Finally, the Advisory Committee recommendslongitudinal data sets. In the longitudinal records, support for the additional funding that will bethe dynamics of business and innovation begin necessary to implement the recommendations.to emerge.1 Total factor productivity (TFP) is output per unit of total input(hours worked and use of capital). The growth of TFP in excessof the growth of total inputs is attributable, in part, to innovation. iii
  10. 10. Innovation Measurement: Tracking the State of Innovation in the American EconomyHOW THE BUSINESS CONCLUSIONCOMMUNITY CAN HELP The recommendations, if adopted, will go far inMeasuring innovation must be a collaborative setting this nation on a course toward effectivelyprocess, and there is much that the business measuring the impact of innovation on the economy.community can do to assist and drive improvements The work is essential to understanding andin innovation measurement. In particular, the developing better policies for innovation. TheAdvisory Committee recommends that the business Committee calls on the government, the businesscommunity: community and researchers to work together to improve the understanding and measurement of I Create, expand and assess firm and industry- innovation. level measures of innovation and develop best practices for innovation management and accounting. I Participate in research activities and, as appropriate, make innovation information available to researchers.One of the guiding principles endorsed by theAdvisory Committee was that innovation datacollection efforts should build on the way firms assessthe effectiveness of their innovative activities.Individual firms, trade associations and otherorganizations are important partners in developingand testing innovation measures.WHERE RESEARCH IS NEEDEDWhile our understanding of innovation has increasedover recent years, much more needs to be learnedabout innovation and its measurement.Government, business, and academic researchersshould undertake research – alone and incollaborative efforts – to understand innovationbetter. In particular, the Committee recommendsexploration of the following research areas: I Identification and assessment of innovation outcome measures. I Identification of gaps in innovation data and how they might be filled. I Analysis of relationships between innovation activities and collaboration, innovation performance and firm performance. iv
  11. 11. Innovation Measurement: Tracking the State of Innovation in the American EconomyCOMPLETE LIST OF I Develop linkages within and between existingADVISORY COMMITTEE data; for example, develop linkages between establishment-based data sets and firm-basedRECOMMENDATIONS data sets to provide both greater consistency in estimations and to provide researchers a broaderWHAT THE GOVERNMENT range of innovation data.SHOULD DO I Develop more robust classification methods; forCreate a stronger framework for identifying and example, classify firms on the basis of bothmeasuring innovation in the national economy. domestic and international activities. I Develop annual, industry-level measures of total I Seek expanded interagency data sharing/ factor productivity by restructuring the synchronization legislative authority in order to National Income and Product Accounts improve the quality of innovation measures (NIPAs) to create a more complete and while balancing data needs with confidentiality consistent set of accounts integrated with data protection. generated by other statistical agencies to allow for the consistent estimation of the Increase access to data in order to facilitate more contributions of innovation to economic robust innovation research. growth. I Increase the transparency of and access to public I Create a supplemental innovation account for data by fostering the use of data tagging and the NIPAs in order to expand the categories of similar processes. innovation inputs and allow those inputs to be tracked as they flow between industries. I Create more public use files in order to encourage more non-governmental research. I Improve service sector data and increase survey coverage to provide the data needed to improve I Expand non-government researcher access to estimates from the integrated GDP/productivity confidential micro-data, including that on accounts and supplemental innovation account. business dynamics, while maintaining high standards for confidentiality. I Improve measurement of intangibles, particularly intellectual property, building on Convene one or more workshops or forums under work currently under way at the National the auspices of the Secretary of Commerce to Science Foundation. Consider the best way in discuss innovation drivers, impediments which to collect data on transactions involving and enablers. key intangible assets such as intellectual property licensing expenditures and revenues. Continue participation in the international The Commerce Department should also explore dialogue related to measuring and analyzing whether additional identifying information innovation and ensure that U.S. efforts are from patent and trademark applicants might internationally compatible to the extent possible. provide useful data. Consider development of a national innovationBetter leverage existing data among the index when more work has been done on bothgovernment statistical agencies to allow for the data collection and analysis of innovation drivers.consistent estimation of the contributions ofinnovation in the GDP and productivity accounts Support funding necessary to implement theand to develop greater understanding of above recommendations.innovation. v
  12. 12. Innovation Measurement: Tracking the State of Innovation in the American EconomyHOW THE BUSINESS COMMUNITY I Assessment of the feasibility, cost, and burden ofCAN HELP developing measures of innovation intensity, including a review of other countries’ experienceCreate, expand and assess firm and industry-level in this area, and consideration of a pilot project.measures of innovation and develop best practicesfor innovation measurement. I Analysis of the qualitative and quantitative impacts of specific innovation drivers, I Institute firm-level measures of innovation to impediments and enablers on innovation test the correlation of particular measures with outcomes. known innovation and to measure innovation in the firm and its impact on firm performance. Identification of gaps in innovation data and how Possible measures might be based on market they might be filled. share or on innovation intensity (e.g., the share of firm revenue attributable to recently I Identification of new data that would be useful introduced products and services). in measuring innovation. I Develop and implement best practices in I Assessment of the feasibility, cost, and innovation management and accounting. burden of collecting data on intellectual property transactions.Participate in research activities and, asappropriate, make innovation information I Identification of ways to overcome gaps andavailable to researchers. shortcomings in historical empirical measures of intangible investments. I Participate in collaborative projects as a means of assembling a broad range of data related to Analysis of relationships between innovation innovation. activities and collaboration, innovation perform- ance and firm performance. I File public reports in XBRL (Extensible Business Reporting Language), a data-tagging I Analysis of the relationship between innovation format, when it is an option. and occupational employment at firms, using firm-level micro-data.WHERE RESEARCH IS NEEDED I Evaluation of whether firms with high innovation intensities perform better thanMuch more needs to be learned about innovation otherwise similar firms with low intensities.and its measurement. Government, business, andacademic researchers should undertake research – I Assessment of the effect of collaboration onalone and in collaborative efforts – to explore the innovation outcomes and identification of thefollowing research areas: key elements of successful collaborative activities.Identification and assessment of innovationoutcome measures. I Assessment and analysis of cross-national innovation activities of firms. I Assessment of the effectiveness of measures based on market share as innovation measures I Analysis of publicly filed financial and other and the feasibility, cost, and burden of data on firms, particularly as the data become developing such measures. more user-friendly, to identify innovative practices and firms. vi
  13. 13. Innovation Measurement: Tracking the State of Innovation in the American EconomyI Description and explanation of business dynamics and, to the extent possible, analysis of their relationship to innovation using longitudinal business databases.I Exploration of the use of different sources of available data to determine whether there are correlations between innovative performance of firms in different regulatory environments. vii
  14. 14. Innovation Measurement: Tracking the State of Innovation in the American Economy A Message from the Chair WHY MEASURING INNOVATION MATTERS specialized labor markets have produced expandingI n one of his final poems, W.B. Yeats observed, “Measurement began our might.” Considering welfare for more and more people. the role innovation has played in the story ofAmerica’s economic expansion, we might say that But to look at the formal statistical record of theinnovation is our might. As the world’s economies United States economy, the vocabulary of innovationflourish, it will become increasingly easy for our is muted if not silent. To appreciate this lacuna, it isfellow citizens and people across the globe alike to important to understand that our system offorget that this prosperous economic system we all measurement was conceived largely in response to theshare—what I have referred to as “entrepreneurial Great Depression. Since then, our statistical agenciescapitalism,”2—is largely an American invention. To have been remarkably competent at maintaining andmake this observation, however, is not to write a refining public data series. However, the frameworkfinal chapter. Rather, reflecting on this great of our data infrastructure does not support or reflectachievement—sustained long-term growth and the the nature of today’s dynamic economy—anpolitical stability it has engendered—prompts at least economy that has undergone profound changes overfour key questions that are central to America’s next the past seventy years. Whatever innovation is (andeconomic chapter. the concept, as we shall see throughout this report, presents significant definitional problems), its forceThe first is, what is the relationship between in the economy is captured only indirectly.innovation and economic growth? Even the mostcasual of observers must notice processes that yield In an era where capital and labor seem abundant fornot only improvements in the goods and services we at least the foreseeable future, we have come to seeencounter in our daily lives but also radically new innovation as the most important avenue to growth.inventions, unimaginable but a few years or monthsearlier. This is the hallmark of daily economic life. While obviously important, the nexus betweenFrom continuous improvements in computers and innovation and growth is one of the least understoodservice delivery to the evolution of methods to make areas of economic life. One reason is that we havethe human gene respond to medical intervention, not paid sufficient attention to the question ofmankind has come to expect that next year we will growth itself and what drives economic growth.enjoy an economy that produces yet deeper meaning Prior to the industrial revolution, growth was anto the simple expectation that things will be “better, unknown dimension of human experience. It isfaster, cheaper.” This is the axiom of innovation, estimated that for millennia, mankind experiencedand the vocabulary of growth. If we consider the no growth; centuries came and went with livesstate of economic knowledge, we can look back on a changing little. Even more importantly, global wealthtremendous accumulated body of insight. Our remained stagnant—few people became richer anddedication to understanding economic behavior and few poorer. If there appeared to be an expansion ofthe workings of markets has led to what should be wealth in one locale, it usually entailed armedappreciated as marvelously practical knowledge. As conflict in which static goods or precious metals werea result of many years of research, mankind is able to wrested away from another family, city, or nation.operate within a global milieu where central banking Since about 1820, America’s particular form ofsystems, efficient capital markets, and highly entrepreneurial capitalism has presented the most consistent expansion of wealth experienced in history2 Schramm, C. J. 2006. The Entrepreneurial Imperative. – a twenty-fold increase in living standards. And, itHarper Collins. ix
  15. 15. Innovation Measurement: Tracking the State of Innovation in the American Economywas the wealth and opportunity in the United States economy. We thought of ourselves as a nationthat caused nearly all nations to set aside centrally marked by our propensity to invent new things andplanned socialist economic orders in favor of the new processes. Over time, our history suggested todynamic and unpredictable phenomenon of one us that this was in our character. Frederick Jacksonform or another of capitalism.3 Turner, one of our most distinguished historians, developed the frontier hypothesis that suggested thatAs suggested, however, economic growth remains while Americans thought that exploring and movingsomething of a mystery. The chart that follows west was our defining frontier, this was really only apresents an illustration of the relationship between metaphor for the creative pioneering that Americanseconomic growth and economic knowledge. The feel is one of our distinctive shared attributes.triangle, known for Professor Arnold Harberger, whofirst observed the limits of economic research,circumscribes most of what has occupied economistsover the decades. Studies in monopoly theory, labor,public finance, industrial organization, etc., have ashared goal, namely, advancing the optimizedefficiency of the economy so as to capture a marginalgain in growth. But, the story of the growth thatcounts, the tremendous shift over time of the nation’stotal production, is largely unaccounted for in suchoptimization theories. Decades ago, JosephSchumpeter, the first economist to devote himself toentrepreneurship and innovation, wrote: “Thishistoric and irreversible change in the way of doingthings we call ‘innovation’ and we define: innovationsare changes in production functions which cannot bedecomposed into infinitesimal steps. Add as manymail-coaches as you please; you will never get arailroad by so doing.” Many economists have Today we increasingly think of innovation, ratherdocumented that the most important story of than invention, as a word of our times. We believeeconomics is that of how innovation came to be and our propensity to innovate is central to our characterhow it is the hinge that opens the door to and our economy. But just what is innovation, andeconomic growth.4 how is it different from other phenomena that have been with us since our founding? Obviously, as weThe second question that must be addressed in think of innovation in the context of this Committee,thinking about America’s economic future is, what is it is not an ephemeral national characteristic orinnovation? In previous ages, invention was thought personality attribute—it is a defining part of ourto be the key to explaining growth in the American economy. It is the edge where the “new” comes into being and is transformed into a concrete reality that produces benefits. So, one of the first acts of the3 Baumol, W. R. Litan, and C. Schramm. 2007. Good Capitalism, Committee was to develop a definition of innovationBad Capitalism and the Economics of Growth and Prosperity: that tied “new” to “impact.” The Committee decidedYale, 2007. that innovation is “the design, invention,4 The seminal work on this subject is found in Robert Solow, “A development and/or implementation of new orContribution to the Theory of Economic Growth.” QuarterlyJournal of Economics 70:65-94 (1956); and Edward F. Denison, altered products, services, processes, systems,“Sources of Economic Growth in the United States and the organizational structures, or business models for theAlternatives before Us.” (New York: Committee for Economic purpose of creating new value for customers in a wayDevelopment, 1962). For a more recent treatment, see Baumol, that improves the financial returns for the firm.”Landes, & Mokyr, Entrepreneurship and Economic History.Princeton (forthcoming). x
  16. 16. Innovation Measurement: Tracking the State of Innovation in the American EconomyConsidering how to define innovation prompts the there will always be some firms and sectors thatthird question, which is the focus of this report—that innovate at a greater pace than others. Creating ais, how do we measure innovation? For those who single index that treats innovation as a singleworry about questions related to expanding human phenomenon might lend itself to policy distortions.welfare through economic growth, it may be the most It would be used immediately in discussions of whatimportant practical inquiry of our times. This report policy steps might be appropriate to stimulatesuggests the complexity of this task. It describes the innovation, and an error in the construction of suchissues surrounding the definition of innovation. a unitary index could play through to disastrousAnd, as might be expected, it points to what amount consequences.to proxy measures. As we deliberated, it became clearthat sufficient research does not exist to guide us In the absence of a single indicator, the Committeetoward a single measure. Perhaps this will always be proposes that the Department of Commerce takethe case. The very nature of innovation suggests that steps toward improving, integrating, and expandingit will never yield to a tidy and static metric. An on its current data collection efforts in the next fewenormously complex economy produces millions of years, while research is undertaken to better informways in which “better, faster, cheaper” comes into the task of measuring innovation. Our statisticalplay every single day. system captures two of the major inputs that are linked to the innovation process: research andIn this regard, the report serves as a pointer, development spending and the number of engineers,describing the first steps of what will necessarily be a scientists, and technicians employed. In addition,very long, maybe never-ending journey. The data are collected on some other categories ofCommittee recommendations start with a suggestion investments, such as expenditures on informationthat better measures of the growth in “total factor technology equipment, which is certainly a factor inproductivity” – the change in productivity left over expanding innovation. We also measure the numberafter taking account of the growth of capital and of innovations that are protected by newly-issuedlabor – are required to begin to zero in on the patents each year. But, in many firms and industries,contribution of innovation. In reaching this significant amounts of investments in innovation areconclusion we have benefited from the particular made outside of these categories and go consistentlyexpertise of Professor Dale Jorgenson, one of our unmeasured or unconnected by the current statisticalfellow members. But, total factor productivity is, as system. Indeed, even for the variables we measure,we’ve noted, a surrogate approach. Such a measure such as research and development, the Committeeonly accounts for a portion, albeit a large portion, of recognizes the need to update the way we quantifythe change in the economy’s performance that might these measurements, the frequency of ourbe said to be innovation. There are other measures measurement, and our coverage of younger firms andthat add more texture to the task but make any emerging industries. Further, we must developapproach to an inclusive measure that much more finely calibrated measures of how firms investmore difficult. in the inputs that become innovation, especially human capital.In fact, after extensive consideration, the Committeehas concluded that as much as an aggregate measure In the absence of common public measures of theof the entire economy’s innovation might be scope of innovation, many surrogates have sprung updesirable, recommending an “innovation index,” a in the private sector. Numerous interest groups,sort of all-in-one measure of innovation, would be industry associations, and think tanks produceunwise given the current state of research on indices of innovation that should be considered asinnovation and economic growth. A single index part of the expanding mosaic of data sources. In fact,would be hard to construct and harder still to defend. one of the innovations resulting from this reportInnovation being innovation, it would hardly be might be that the government absorbs several of theestablished before it would have to be changed. most statistically valid private sector data series intoMoreover, the economy does not innovate evenly: its own overall measures of innovation. xi
  17. 17. Innovation Measurement: Tracking the State of Innovation in the American EconomyThe final question is the most important one of all. of innovation and then focus on what we knowWhat can we do to drive the American economy to a already as key factors for innovation. Withoutstate of continuous and sustained growth by making doubt, we must have people who are skilled andour country more innovative? Making innovation an trained to see the opportunities where the “better,explicit concern of public policy requires that we can faster, cheaper” can be realized. This means in realmeasure how innovative the economy is, as well as terms that our schools, community colleges, anddetermine whether the “state” of innovation is university-level institutions must prepare more of ourimproving or decaying. It also requires that we young citizens to be better able to advance technicalunderstand the pathways of innovation lest we insights such that innovative products and servicesdevelop the wrong policy interventions, either to continue to flow into our economy.quicken innovation or to shift its course. While it isdifficult to say what policy should be, some things are If we are to grow, we need more and more peopleunderstood and should inform policy considerations. ready to take entrepreneurial risk. And, we need them flowing from institutions attuned to producingFor example, innovation is meaningless if not particularly creative people for the new economy.considered in the larger context of growth. Indeed, Recent economic and psychological research hasgrowth should be the touchstone of policy, and in the confirmed what scientists and entrepreneurs havecase of innovation, it is important to understand its known for decades: innovative breakthroughsrole. Innovation propels growth by pushing existing frequently come at the estuary region where differentcompanies to real cost reductions and new firms fields, not necessarily related, intersect. This meanstoward growth. The United States remains unique we need much more cross-disciplinary training wherein its ability to grow companies. Every year roughly the edge between fields can be developed for thethirty-one firms achieve “top line” revenue in excess innovations that lie within.of $1 billion.5 Each one of the firms that experiencesthis kind of growth takes as its basis some innovation In conclusion, the work of the Committee hasin the nature of its products or in the nature of its brought together experts from across government,approach to marketing. industry, and academia to consider changes that can be made today to improve our understanding of theEntrepreneurial activity, both in start-ups and in American economy and its innovative capacity inexisting large-scale companies, is critical to the firm’s the future. Measuring innovation is central tosuccess. Every entrepreneur is a party to innovation; understanding the economy as it evolves andin fact it could be said that entrepreneurs are to our responds to growing world competition. Indeed, it iseconomy as the marines are to our armed forces. better to travel an illuminated path toward futureCalculated risk taking, with a goal that is often only economic progress than to stumble in an unlitdefined as “let’s win,” is the mindset of entrepreneurs, direction. Improvements to our measurement ofboth those working on their own and those who innovation will help to ensure continued economicshoulder the path-breaking and often risky task of strength.changing the culture and identity of mature firms.To make the economy more congenial to innovationis to construct an economic culture that appreciateswhat entrepreneurs do.As we consider these observations, it is clear that oureconomic ecosystem can be helpful to innovation andits ability to flourish. Policy should first focus onputting in place improvements to our measurement5 Thomas, David G. 2006. Blueprint to a Billion: 7 Essentials toAchieve Exponential Growth. John Wiley & Sons xii
  18. 18. Innovation Measurement: Tracking the State of Innovation in the American Economy Chapter One The Current State of Innovation Measurement and the Establishment of the Advisory Committee subsidiary Total System Services, now one of theI nnovation propels economic growth. Yet the measurement of innovation, in this country and world’s largest processors of credit cards. It elsewhere, remains rudimentary. To understand started when his small Georgia bank, one of thebetter the dynamics of economic growth and, first to issue a credit card, bought somehopefully, avoid harmful policies and enact computers, wrote a program from scratch andfacilitative policies, we must design improved automated the entire operation. Ten years later,measures of innovation. With this objective in mind, BankAmericard automated and Synovus becamethe Secretary of Commerce, Carlos M. Gutierrez, the first bank to use the process. In 1974,established the Advisory Committee on Measuring almost as a joke, the company offered to processInnovation in the 21st Century Economy. cards for another bank. The other bank accepted the offer and that started a process thatIn the popular mind, innovation is often equated continues today. In 1983 Synovus spun off thewith invention. In some cases, this is correct – operation, capitalized it, and did an initialThomas Edison stands out as a prominent example – public offering (IPO). Today it is listed on thebut invention is simply one type of innovation. New York Stock Exchange and processes overInnovation can be an astounding breakthrough (as 400 million credit card accounts all over thewas often the case with Edison), a mundane shift in world.process, or a subtle change in culture. Yet each typehelps generate a higher yield on resources, boosting I John Menzer, Vice Chair of Wal-Mart, spoke ofeconomic growth. Examples provided by members his company’s process-based gains in the areas ofof the Advisory Committee at its first meeting environmental sustainability, prescription drugsillustrate this variety. and supply chain efficiencies. He considers Wal-Mart’s process innovation to be a unique I David Bernd, CEO of Sentara Healthcare, an marriage of corporate culture, imagination and integrated health care provider in Virginia, technology. He spoke of setting big stretch goals spoke of getting a cold call from a small start-up for the company and associates—a 25 percent company. The caller told him about an more efficient trucking fleet in three years and innovative method of remotely monitoring double in ten years, a 20 percent reduction in intensive care beds from a centralized location. energy use in new stores in four years, and a Sentara ultimately became the first hospital to 25 percent reduction in solid waste in three use the system, and now remotely monitors years. The company has no specific plans in 101 intensive care beds in five institutions. The place to meet the goals but uses the goals to hope was that the new system would improve inspire associates to help the company get there, the quality of care. At the end of two years, create a business environment that thrives on Sentara found that mortality had been reduced new ideas and change, and challenge their by 15 percent, ICU length of stay was reduced supplier base to set individual goals. And he by 16 percent, variable costs went down noted that all Wal-Mart’s innovation is geared 25 percent and retention of registered nurses in toward a better consumer experience and better the covered units went up 20 percent. returns for the company. I James Blanchard, former CEO of Synovus, I Michael Eskew, Chairman and CEO of UPS, spoke of the creation of his company’s spoke about how UPS transformed itself from a 1
  19. 19. Innovation Measurement: Tracking the State of Innovation in the American Economy local delivery company, to a ground company, information); (3) the Internal Revenue Service to an air company, to an international company, (tax-based data on individuals and businesses); to a supply chain company and to what is now and (4) the Federal Reserve Board (income largely a technology company. UPS currently statements and balance sheets for major uses four innovation processes. For innovation financial and non-financial sectors). related to its core business it relies both on an internal marketing committee and on external I The Bureau of Economic Analysis, with support sources, primarily customers. For ‘non-core’ from the National Science Foundation (NSF), innovation, UPS uses both an internal strategy has developed a Research and Development group and external groups including universities Satellite Account that estimates the effect of and pre-IPO venture companies funded by a investment in research and development on UPS strategic enterprise fund. U.S. economic growth. These experimental estimates of the effect of intangible assets onThese examples underscore the challenges in the U.S. GDP show the size of the impact ofattempting to measure innovation in the economy. research and development (R&D) on U.S. economic growth. BEA also collects data on international technology licensing expenditures.The State of Innovation I The Census Bureau has data on some measuresMeasurement of innovative activities, such as the diffusion of innovation, human and organizational capital,Innovation measurement is in its infancy – both here entrepreneurship and other worker and firmand around the world. Some data related to characteristics. It is working on improvementsinnovation are collected by the U.S. government in some areas of importance to innovation,statistical agencies; however, the data are incomplete particularly related to the service sector.and miss substantial sources of innovation in the Detailed information has long been collectedeconomy. Some innovation data are tracked by on manufacturing activities; only recently hasprivate sector organizations and firms, but these emphasis been put on non-manufacturingefforts are also limited. Recently, however, sectors. The Census Bureau, on behalf of thegovernment agencies, businesses and trade National Science Foundation (NSF), conductsassociations have been devoting more resources an annual firm-level survey of industrial R&Dtoward the development of such data. that requests data on firms’ R&D investments. Census has also created an IntegratedExamples of some of the U.S. statistical agency Longitudinal Business Database (ILBD)programs that either currently collect innovation- that includes businesses with and withoutrelated data or could be vehicles for enhanced employees, permitting tracking of the growthinnovation data collection and analysis through of start-ups and other aspects of businesslinkages, new data or new analysis include dynamics.the following: I The Securities and Exchange Commission I The Commerce Department’s Bureau of (SEC) collects extensive data from public Economic Analysis produces the U. S. National companies. The SEC has embarked on a data- Income and Product Accounts (NIPAs). The tagging project that will permit analysis of such major agencies providing data for the NIPAs financial data across public firms. include: (1) the Census Bureau (data from business and population censuses and surveys); These examples represent just some of the sources (2) the Bureau of Labor Statistics (employment of innovation-related data available. While they statistics, wage and salary data, productivity currently provide data on only some pieces of the statistics, and most underlying price innovation puzzle, they provide a trove of possibilities 2
  20. 20. Innovation Measurement: Tracking the State of Innovation in the American Economyfor the development of innovation data in Committee sought comments in four categories:the future. (1) improvement of the underlying architecture of the U.S. system of national accounts to facilitateDedicated innovation surveys such as the European development of an improved and more detailedCommunity’s Community Innovation Survey are measure of innovation and productivity;used by statistical organizations in European Union (2) identification of appropriate economy-wide andand some other countries including Australia and sector-specific statistical series or other indicators;Canada. Relatively new, and only tested among (3) identification of firm-specific data items thatmanufacturing firms in the U.S., the surveys collect could enable comparisons and aggregation; andinformation on different varieties of innovations, (4) identification of specific ‘holes’ in the currentincluding ‘new to the firm, new to the industry and data collection system that limit our ability tonew to the world.’ They also collect extensive measure innovation.information on innovation expenditures (e.g., capitalinvestment, training and marketing costs) and costs The Committee received a broad array of thoughtfulof protecting innovation (e.g., patent and copyright and substantive responses that covered the full rangecosts). However, such surveys are very costly and of categories for which comments were sought. All ofhave encountered both definitional and response the comments were considered during therate problems. Committee’s deliberations. In determining the path on which to direct its recommendations, the Advisory CommitteeThe Establishment of the determined that its recommendations would buildAdvisory Committee on existing and ongoing work to the extent possible. Where appropriate, new approaches or new dataSecretary Gutierrez formed the Advisory Committee would be recommended but, in the interests of costto enlist the help of leading business representatives and delivery time, the primary focus would be onand academics in formulating a plan for improving improving the scope and robustness of existing work.innovation measurement in this country. One of thefirst steps taken by the Committee was the adoption The Committee recognized that, at least at this time,of a definition. there is only limited knowledge about innovation drivers, impediments and enablers. And there wasFor the purposes of its work, the Advisory awareness of the fact that many businesses do notCommittee defined innovation as: currently collect all the data that might be desired in an ideal world. The design, invention, development and/or implementation of new or altered products, Because it is also clear that innovation measurement services, processes, systems, organizational is still in its infancy, the Committee chose to structures, or business models for the purpose of recommend differing approaches to innovation creating new value for customers and financial measurement. There is no single innovation measure returns for the firm. that can be recommended at this time, but the data and analysis to be generated by the improvedEarly last year, the Advisory Committee published a innovation measures recommended by theFederal Register request for public comments on Committee should lead to greater understanding ofinnovation measurement. The purpose of the the process of innovation and prove valuable tonotice was to get broad input into the work of policymakers in the future.the Committee. The next chapters detail the principles andIn the notice, the Committee asked for comments recommendations endorsed by the Advisoryon improved or new innovation measures. The Committee. 3
  21. 21. Innovation Measurement: Tracking the State of Innovation in the American Economy Chapter Two GUIDING PRINCIPLES FOR INNOVATION MEASUREMENT When developing better ways to quantifyT he Advisory Committee’s recommendations I are intended to improve the measurement of innovation in the marketplace, consideration innovation and its impact on the U.S. should be given to measuring the impact ofeconomy. In particular, the goal is to develop better legislation and regulations on innovation.estimates of the resources devoted to and valuegenerated by innovation by focusing not only on Some regulatory policies (e.g., certain tax andmeasuring innovation activities and inputs but also education policies) may explicitly supporton innovation results and outputs. innovation. Other policies may have the unintended consequence of inhibiting innovation (e.g., overlyMeasuring innovation has not been a major goal of restrictive caps on immigration and some Sarbanes-economic data collection by U.S. statistical agencies. Oxley rules). Improved data on innovation areInnovation measurement to date has been largely essential for assessing the impact that regulatorypiecemeal, incomplete, and accidental (i.e., relying policies have on innovation. Better firm-specific andon data sets not designed for the purpose of economy-wide data will help reveal the impact – bothinnovation measurement). positive and negative – of regulatory policies on innovation and the environment that producesImproving our understanding of how much is spent innovation.on innovation and how much we benefit frominnovation is crucial to answering several key I Because of the nature of innovation and, inquestions: Are we as a society spending too much or particular, the collaborative nature of thetoo little on innovation? Are the places in which innovative process, there needs to be tolerancefocus is being given to innovation having results? of qualitative and subjective measures.And what, if anything, can we do to improve ourinnovative activities in the future? Not all measures of innovation may be quantifiable; and progress in developing better quantification ofThe Committee’s recommendations call on the some dimensions of innovation may depend ongovernment, the business community and researchers improved qualitative measures. For example,(in both government and the private sector) to work measuring the resources invested in and the outcomestogether to further both the understanding and the of collaboration may be very important but also verymeasurement of innovation in the economy. difficult, especially if such partnerships are informal or if the benefits are subject to spillovers (i.e., areThe Advisory Committee recommends that the work difficult to capture fully in a contractualbe guided by the following principles. arrangement). I Innovation data collection efforts should build I Innovation measurement should not be static. on the way firms assess the effectiveness of their Measurement is an iterative process that needs innovative activities. to be treated less like a ‘project’ and more like an ongoing ‘dialogue.’ Learning andData collection should be informed by what firms are improvement are to be gained from each stageactually doing rather than being based solely on of the process.theory. Also, to the extent possible, the burden onfirms should be minimized. 5
  22. 22. Innovation Measurement: Tracking the State of Innovation in the American EconomyAs new innovation data are collected, they should be economic growth rates. When compared withrefined and continually re-evaluated for their cost- different national policy mixes, it may be possible toeffectiveness and ability to push out the frontiers of achieve a better understanding of the impact publicknowledge about innovation and its impact on the policies have on growth and innovation.economy. The government needs the aid of theresearcher community in order to do so in a timely I A conservative approach should be taken to anymanner. And while timeliness is important in new data collection efforts by recognizingunderstanding innovation, different measures of tradeoffs between costs and potential benefitsinnovation may capture relatively quick-return and considering resource and regulatoryinnovation while other measures may capture constraints. The implementation of pilotinnovations which require longer periods of time to projects to gauge the costs and benefits of newcause measurable economic change. data collection efforts is encouraged. To the extent possible, new innovation measures should I Innovation measures should allow for analysis be able to be ‘back-tested’; that is, if applied to at the establishment, firm, industry, country, historical data, the measures should produce the international and, where possible, expected innovation relationship. regional levels. The costs of new data collection include both directImproved data on innovation should permit program costs and the cost burden imposed onindustry- and sector-specific analysis, recognizing potential survey respondents. Many conceptual ideasthat innovation manifests itself differently in for new data collection need to be tested on diversedifferent parts of the economy. In particular, industry samples of large and small or young and oldinternational comparisons would help explain why firms before new surveys (or substantial changes todifferent countries are experiencing different existing surveys) are implemented. 6
  23. 23. Innovation Measurement: Tracking the State of Innovation in the American Economy Chapter Three WHAT GOVERNMENT SHOULD DO Analysis (BEA) to estimate output, income andT o measure innovation and its economic impact better, the government must make expenditure, trade, capital formation, and wealth in structural refinements to existing the U.S. economy. The NIPAs were devised to helpgovernment data sets, improve linkages among them, policymakers deal with the severe economiccollect new and better data, and expand data fluctuations produced by the Great Depression andsharing/synchronization. World War II. The NIPAs were not originally designed to measure innovation or delve into theThe Advisory Committee’s recommendations for causes of long-term productivity growth. Today,government action and the elements within each however, when policymakers are increasingly shiftingrecommendation are discussed in this chapter. attention from short-term stabilization to long-term economic growth, changes need to be made to1. THE GOVERNMENT SHOULD CREATE A measure innovation in this context.STRONGER FRAMEWORK FOR IDENTIFY-ING AND MEASURING INNOVATION IN THE Economic growth depends – in large measure – onNATIONAL ECONOMY. productivity growth. Innovation is a major determinant of productivity growth. WithoutRefining the framework for measuring the innovation, output generally can only grow byperformance of the national economy is an essential increasing inputs – through a combination ofelement in the government’s program to measure expanding the labor force and increasing theinnovation. These improvements will take time, as utilization of capital (such as machines, buildings,there is considerable preliminary work to be done. and skills, using existing technologies). TheThe four major elements of this program include: implementation by entrepreneurs, managers, andrefining the National Income and Product Accounts employees of innovations – in the form of new(NIPAs) to permit estimation of industry-level products or services, processes, organizationalmeasures of total factor productivity; creating an structures, or business models – enables outputinnovation supplementary account; improving growth to exceed the growth of inputs. Measuringservice sector data; and improving the measurement that excess growth – known as Total Factorof intangibles (particularly intellectual property and Productivity (TFP) growth – for the entire privateimproved measures of technology licensing activity). sector economy as well as by industry is the primaryEach of these elements is discussed in more detail goal of this proposal. A longer-term goal, discussedbelow. later in this report, is to parse TFP growth estimates into amounts attributable to expenditures by firms I Develop annual, industry-level measures of total on scientific R&D and information technologies factor productivity by restructuring the NIPAs (using available data), and other measurable to create a more complete and consistent set of investments by firms in innovation (using data the accounts integrated with data generated by Committee proposes to be collected), and amounts other statistical agencies to allow for the due to other factors. consistent estimation of the contribution of innovation to economic growth. The Committee recommends an ambitious program to eliminate gaps and inconsistencies within theThe NIPAs constitute the official framework used by NIPAs and between data produced by other statisticalthe Commerce Department’s Bureau of Economic agencies and those produced by BEA. The proposed 7
  24. 24. Innovation Measurement: Tracking the State of Innovation in the American Economynew ‘architecture’ for the NIPAs would consist of a measures of TFP will allow for rigorous comparisonsset of income statements, balance sheets, flow of of the sources of growth across countries and overfunds statements, and productivity estimates for the time. Such information would be valuable toentire economy and by sector that are more accurate policymakers trying to gauge the effectiveness ofand internally consistent. The new architecture will national innovation policies.make the NIPAs much more relevant to today’stechnology-driven and globalizing economy and will I Create a supplemental innovation account forfacilitate the publication of much more detailed and the National Income and Product Accountsreliable estimates of innovation’s contribution to (NIPAs) in order to expand the categories ofproductivity growth. innovation inputs and allow those inputs to be tracked as they flow between industries.The most salient (for purposes of this Committee)goal of the proposal is to integrate BLS’s current TFP Supplemental accounts (sometimes referred to as(also known as ‘multifactor productivity’) growth satellite accounts) provide additional detail about aestimation program with the NIPAs and extend their part of the economy using the same structure as thecoverage to all industries. Doing so would require National Income and Product Accounts withoutcompletion of BEA’s plan to improve its industry- being integrated with the NIPAs. Establishing a newlevel statistics, including fully integrating its input- supplemental account that is conceptually consistentoutput tables with the NIPAs and incorporating new with the NIPAs but based on data that are not asdata collected by the Census Bureau on the output time-tested as those used in the core NIPAs helpsand intermediate inputs of services industries, as facilitate the development of the NIPAs. Fordescribed later in this report. Greater coordination example, in 2006, BEA inaugurated a supplementalbetween BEA and BLS will be required in other areas account for investments in research and developmentas well, including increased data sharing between the activities conducted by scientists and engineers;two agencies; acceleration of the development of the ultimately, BEA proposes to incorporate the R&Dcapital services accounts; and expansion of efforts to supplemental account into the NIPAs.incorporate quality adjustments and identify newproducts and services for prompt inclusion in BLS’s Developing a broad supplemental innovationConsumer, Wholesale, and International Price Index account for intangible assets – including estimates ofprograms. In addition, BEA will have to work with intangible asset capital stocks and service flows –the Federal Reserve Board (FRB) to develop an would introduce a broader range of capital inputsintegrated wealth account. into the NIPA product and capital accounts. Such inputs have hitherto been classified as expenses ratherThe new NIPA architecture will be flexible enough to than as accumulated capital. Data on intangible assetaccommodate the inclusion of information from new capital stocks and service flows could be used tosupplemental accounts and to permit the easy further refine estimates of the impacts of innovationincorporation of these accounts into the proposed on economic growth.NIPA system. Data developed for capital stocks andservice flows for intangible assets (such as technology The Committee calls for the development of a newthat passes among firms through licensing NIPA supplemental innovation account that wouldagreements and other forms of intellectual property) include intangible assets, such as investments bycan be used to parse TFP growth estimates. firms in research and development (conducted by scientists and engineers as well as workers in otherThe TFP growth estimates proposed by the occupations); human capital; patents and tradeCommittee would be consistent with estimates secrets; copyrights, trademarks and brands; and othercurrently published by the European Union, Canada, forms of intellectual property. The development of aJapan, and South Korea and with estimates planned supplemental innovation account depends on theby other countries, including Brazil, China, India, collection of additional data on intangibleand Russia. The availability of consistently estimated innovation assets. 8
  25. 25. Innovation Measurement: Tracking the State of Innovation in the American Economy I Improve service sector data and increase survey licensing and transfers) are considered particularly coverage to provide the data needed to improve innovative, better data on the service sector will estimates from the integrated GDP/productivity improve our understanding of innovation processes. accounts and supplemental innovation account. Improved services price indices will improve estimates of inflation-adjusted inputs purchased fromIt is widely believed that much innovation in recent the service sector inputs, including those purchaseddecades has taken place in the service sector, and this from highly innovative industries, and will enhancebelief is bolstered by evidence (albeit based on the quality of estimates of productivity growthincomplete and highly aggregated data) that service attributable to innovation.sector productivity has increased after a long periodof stagnation. However, collection of annual data on I Improve measurement of intangibles,the service sector has lagged that of other sectors (in particularly intellectual property, building onparticular, manufacturing), and improved service work curently under way at the Nationalsector data collection is a necessary step toward better Science Foundation. Consider the best way inmeasurement of innovation and its impacts in the which to collect data on transactions involvingservice sector. key intangible assets such as intellectual property licensing expenditures and revenues.The Census Bureau has long covered retail and The Commerce Department should also explorewholesale trade in its annual surveys. Of the rest of whether additional identifying informationthe service sector, which currently accounts for 55 from patent and trademark applicants mightpercent of GDP, the Census Bureau’s annual survey provide useful data.covers only 30 percent of GDP. Put another way, theCensus Bureau does not collect annual data on one- Statistical agencies largely focus on collecting data onquarter of the nation’s economy. firms’ investments in physical capital. Little is known about firms’ investments in intangible assets beyondThe Committee recognizes that the funds needed to data on expenditures on scientific and engineeringimplement the Census Bureau’s proposal to extend research and development collected by the Censusannual survey coverage to all remaining service sectors Bureau for the National Science Foundation (NSF)by FY2010 and to improve the data on service and data on own-account software developmentindustry inputs have not been appropriated. The collected by the Census Bureau. Data oncurrent lack of funding will impede some activities investments by firms in ‘research and development’necessary for improved innovation measurement. For activities other than scientific and engineering R&Dexample, BEA’s efforts to develop more detailed data are scarce, as are data on investments inon the input/output matrices to track innovation organizational and human capital and marketing andacross industries hinges on the Census Bureau brand equity.collecting more comprehensive service sector data. Data on patent and trademark applications andThe Committee also calls for the development of a assignments are publicly available, but it is difficultmore nuanced classification system with finer for researchers to match these data to data ongranularity of data on different types of economic applicants and assignees. Better matching wouldactivity in the service sector. In particular, the help researchers develop ways to put a value onCommittee calls for improved accounting for intellectual property.transfers of intangible assets (such as intellectualproperty licensing and assignments) and the Data are similarly scarce on the income earned ondevelopment of more detailed and quality-adjusted intellectual property. The Bureau of Economicprice indices for services. Analysis collects data on cross-border royalty payments for intangible assets, but no data areSince a number of service sector industries (e.g., currently collected on purely domestic royaltysoftware, consulting, and intellectual property revenues and payments. 9
  26. 26. Innovation Measurement: Tracking the State of Innovation in the American EconomyThe lack of information on intangible assets’ 2. THE GOVERNMENT SHOULD BETTERdepreciation rates and how to adjust the value of LEVERAGE EXISTING DATA AMONG THEinvestments in intangibles for price inflation makes it GOVERNMENT STATISTICAL AGENCIES TOdifficult to estimate the wealth that is created by ALLOW FOR THE CONSISTENT ESTIMA-firms’ investments in innovation. Sound estimates of TION OF THE CONTRIBUTIONS OF INNO-intangible capital stocks are needed to refine VATION IN THE GDP AND PRODUCTIVITYestimates of innovation’s contribution to productivity ACCOUNTS AND TO DEVELOP GREATERgrowth. However, intangible asset valuation is UNDERSTANDING OF INNOVATION.difficult because of the relative scarcity of directlyobservable prices, and the data collection and Much could be learned about innovation from datamethodological challenges are daunting. that have already been collected if the statistical agencies were to develop new linkages. Much of thisThe Committee recommends improvements in work would require new legislative authority.intangibles measurement by expanding datacollection on intangible investments beyond I Develop linkages within and between existingscientific and engineering R&D and own-account data; for example, develop linkages betweensoftware development to include all resources establishment-based data sets and firm-baseddevoted to innovation. Such improvements might be data sets to provide both greater consistency inachieved by expanding NSF’s R&D survey to estimations and to provide researchers a broaderencompass a broader range of innovation investment range of innovation data.activities. Past experience with collecting such data atBLS and in other countries (notably Canada) could Most U.S. industry statistics are estimated usingbe used to inform the development of a survey in the establishment-level data as the basic ‘building blocks.’United States. An establishment is a commercial or non-profit entity at a single physical location that producesThe U.S. Patent and Trademark Office should collect goods or performs services, for example, a store or aadditional identifying information from patent manufacturing plant. Statistical agencies gather dataand trademark applicants to facilitate matching from establishments located within the United Statesapplication and assignment data to census and operating within the same industry and publishother data sets. Such information could include descriptive statistics for each industry based on suchEmployer Identification Numbers (with appropriate data. Such statistics have been very useful for manyconfidentiality safeguards), CUSIP numbers, DUNS purposes, as they combine data for establishmentsnumbers, or other widely used firm identifiers. that do approximately the same things.Collecting such additional information shouldimpose little additional burden on patent and However, many firms own or control more than onetrademark applicants and would aid the development establishment, and those establishments may beof patent quality indices using stock market located in different geographic areas and may bevaluations and other data. producing different kinds of goods or performing different kinds of services, some of which may beThe Committee further recommends that BEA and important to innovation. Statistics based on firm ratherthe Census Bureau collaborate to collect domestic (as than establishment data can be useful in otherwell as cross-border) data on revenues from and contexts, especially in innovation measurement. Byexpenses associated with licensing and transferring disassembling the establishment building blocks used totechnology (patents and trade secrets), copyrights, construct industry statistics and reassembling them intofranchise fees, and trademarks. firm-based statistics, better innovation measurements may be obtained. Furthermore, firm or establishmentFinally, the Committee calls for the development of data from one data source can be augmented byimproved estimates of depreciation rates of intangible matching to corresponding data from other sources toassets and specific price indices for intangible assets. obtain a more complete picture of innovation. 10

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