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Innovation Measurement
Tracking 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
Innovation Measurement
Tracking 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
Innovation Measurement: Tracking the State of Innovation in the American Economy




  ADVISORY COMMITTEE MEMBERS

                                                     CHAIR
                                                   Carl Schramm
                                               President and CEO
                                        Ewing Marion Kauffman Foundation


BUSINESS MEMBERS                                               ACADEMIC MEMBERS

Steve Ballmer                                                  Ashish Arora
CEO                                                            Professor of Economics and Public Policy
Microsoft Corporation                                          H. John Heinz III School of Public Policy
                                                                 and Management
David L. Bernd                                                 Carnegie Mellon University
CEO
Sentara Healthcare                                             Rajesh Chandy
                                                               James D. Watkins Professor of Marketing
James Blanchard                                                Carlson School of Management
Retired Chairman of the Board and CEO                          University of Minnesota
Synovus Financial Corp.
                                                               Kathleen B. Cooper
George Buckley                                                 Senior Fellow
CEO                                                            Tower Center for Political Studies
3M                                                             Southern Methodist University

Art Collins                                                    Dale W. Jorgenson
Former Chairman and CEO                                        Professor of Economics
Medtronic                                                      Harvard University

Michael Eskew                                                  Donald Siegel
Chairman and CEO                                               Professor and Associate Dean
UPS                                                            Graduate School of Management
                                                               University of California at Riverside
Luther Hodges, Jr.
President
Phoenix Associates, Inc.

John Menzer
Vice-Chairman
Wal-Mart Stores

Samuel J. Palmisano
Chairman, President and CEO
IBM Corporation
Innovation Measurement: Tracking the State of Innovation in the American Economy




                       Acknowledgements

The members of the Advisory Committee would like to acknowledge the contributions of those who
have assisted us in our task.

We are very appreciative of the assistance we have received from U.S. Department of Commerce
personnel. We are particularly grateful for the work of Patricia Buckley, the Executive Director of the
Advisory 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 for
Economic Affairs.

We have benefited greatly from the guidance of Cynthia A. Glassman, Under Secretary for Economic
Affairs, and appreciate the assistance we have received from her staff at the Department as we have
prepared this report.*

We are also grateful for the support of the Department’s statistical agencies: the Census Bureau and
the Bureau of Economic Analysis.

In addition, we wish to thank all those who submitted comments to us in response to our Federal
Register request. All of the submissions helped us greatly in thinking through our ideas and
formulating 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.
Innovation Measurement: Tracking the State of Innovation in the American Economy




                        Transmittal Letter
                       from the Committee
January 2008

The Honorable Carlos M. Gutierrez
Secretary of Commerce
U.S. Department of Commerce
Washington, DC 20230


Dear Mr. Secretary:

You charged this Committee with developing “new and improved measures of innovation” in three areas: how
innovation occurs in different sectors of the economy, how it is diffused across the economy, and how it affects
economic growth. As chair of the Advisory Committee on Measuring Innovation in the 21st Century
Economy, I am pleased to present a report that is the culmination of nearly a year’s worth of study and
consideration by the members, and that we believe represents the most fundamental changes that can be made
to advance our understanding of innovation.

While we recognize that the American economy is changing in fundamental ways—and that most of this
change relates directly to innovation—our understanding remains incomplete. Indeed, data collection and
measurement, while seemingly mundane, loom large in understanding these changes. Policymakers, investors,
executives, managers, consumers, and researchers require accurate and complete information in order to make
informed 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 become
available if the Committee’s recommendations are implemented.

Sincerely yours,




Carl J. Schramm
Chair
Advisory Committee on Measuring Innovation in the 21st Century Economy
Innovation Measurement: Tracking the State of Innovation in the American Economy




                                Table of Contents


EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi


A Message from the Chair:
WHY MEASURING INNOVATION MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix


Chapter One:
THE CURRENT STATE OF INNOVATION MEASUREMENT
AND THE ESTABLISHMENT OF THE ADVISORY COMMITTEE . . . . . . . . . . . . . . . . . . . . 1


Chapter Two:
GUIDING PRINCIPLES FOR INNOVATION MEASUREMENT . . . . . . . . . . . . . . . . . . . . . . . 5


Chapter Three:
WHAT THE GOVERNMENT SHOULD DO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7


Chapter Four:
HOW THE BUSINESS COMMUNITY CAN HELP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15


Chapter Five:
WHERE RESEARCH IS NEEDED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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 and

T
        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 at
Commerce in September 2006 to recommend ways                  www.innovationmetrics.gov.
to improve the measurement of innovation in the
economy. In its report, the Advisory Committee                The following set of principles was developed by the
outlines 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 build
sector researchers to foster and improve the                        on the way firms assess the effectiveness of their
measurement of innovation in the economy.                           innovative activities.

The first act of the Advisory Committee was to                  I   When developing better ways to quantify
establish a definition of innovation that would                     innovation in the marketplace, consideration
identify what should be measured. The definition                    should be given to measuring the impact of
adopted 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 needs
The definition recognizes that the innovation to be                 to be treated less like a ‘project’ and more
measured is more than simply something new; it has                  like an ongoing ‘dialogue.’ Learning and
the added component of adding value for both                        improvement are to be gained from each stage
customers and firms. The definition also recognizes                 of the process.
that innovation measurement needs to extend
beyond simply measuring inputs. While it is                     I   Innovation measures should allow for analysis
important 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 impact
of innovation on the economy.                                   I   A conservative approach should be taken to any
                                                                    new data collection effort by recognizing
As part of its work, the Committee published a                      tradeoffs between costs and potential benefits
Federal Register request for public comments and                    and considering resource and regulatory
received many helpful responses. These comments                     constraints. The implementation of pilot
were extremely useful in informing both the guiding                 projects to gauge the costs and benefits of new
principles and the recommendations adopted by                       data collection efforts is encouraged. To the




                                                          i
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 international
Committee and should also apply to implementation                       dialogue related to measuring and analyzing
of the Committee’s recommendations.                                     innovation and ensure that U.S. efforts
                                                                        are internationally compatible to the
The bulk of the Advisory Committee’s work was                           extent possible.
devoted to developing recommendations to the
Secretary of Commerce for actions to improve                        I   Consider development of a national
innovation measurement. The recommendations                             innovation index when more work has been
endorsed by the Committee are summarized briefly                        done on both data collection and analysis of
below and appear in a more comprehensive list at the                    innovation drivers.
end of this summary. All of the recommendations are
described 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 action
SHOULD DO                                                         build on existing programs or activities. These
                                                                  include the U.S. National Income and Product
To achieve the long-term goal of measuring the                    Accounts (NIPAs) which constitute the official
impact of innovation on the economy, the Advisory                 framework used by the Commerce Department’s
Committee recommends that the government create                   Bureau of Economic Analysis (BEA) to estimate
a coordinated emphasis on innovation measurement.                 output, income and expenditure, trade, capital
The effort will require structural refinements of                 formation, and wealth in the U.S. economy. The
existing government data sets, the collection of new              NIPAs were devised to help policymakers deal with
and better data, improved linkages among statistical              the severe economic fluctuations produced by the
agency data sets, and expanded data                               Great Depression and World War II and have been
sharing/synchronization authority.                                continually refined since then. The NIPAs now
                                                                  provide policymakers with an unrivaled ability to
In particular, the Advisory Committee recommends                  adjust policy quickly and appropriately in response to
that 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
Innovation Measurement: Tracking the State of Innovation in the American Economy



statistical agencies upon which BEA relies for data.                           The Advisory Committee recommends that the
The four major elements of this program are:                                   Secretary support legislation to enable the statistical
integrating industry-level estimates of total factor                           agencies      to    undertake      expanded       data
productivity1 with the NIPAs; creating a                                       sharing/synchronization activities. In particular,
supplemental innovation account; improving service                             amending the law to expand access to IRS data to
sector data; and improving the measurement of                                  additional statistical agencies for the purposes of
intangibles. Work on each of these four elements has                           reconciling the business lists and designing more
already begun, although additional funding will be                             effective survey business frames would improve our
required to move forward.                                                      understanding of the U.S. economy.

The Advisory Committee also recommends that the                                To encourage more research by non-government
statistical agencies pursue an agenda in support of the                        researchers, the Advisory Committee recommends
development of linkages between data sets both to                              that the government encourage innovation research
improve data consistency and to provide a richer data                          by making public data more transparent through the
base for understanding and explaining innovation.                              use of data-tagging or similar methods of making
Full implementation of such an agenda would require                            data more user-friendly and by improving access to
new legislation. The statistical agencies are currently                        data through the creation of more public use data
limited in their authority to share data and that, in                          files. Such efforts are being undertaken currently by
turn, affects data consistency.                                                some agencies and the Committee encourages the
                                                                               expansion of such efforts. In addition, the Advisory
Linkages 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, while
statistics are estimated using establishment-level data                        maintaining high standards for confidentiality.
as the basic ‘building blocks.’ Such statistics have
been very useful for many purposes, as they combine                            A major issue raised by many of the Committee
data 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 was
more than one establishment, and those                                         outside the scope of the Committee’s mandate, it was
establishments may be located in different geographic                          not fully explored. However, given the importance of
areas and may be producing different kinds of goods                            the topic, the Committee calls on the Secretary of
or performing different kinds of services, some of                             Commerce to convene one or more workshops or
which, such as technology licensing transactions, may                          forums to examine innovation drivers, impediments
be of particular importance to the innovation                                  and enablers.
process. Reassembling establishment-level data into
firm-based statistics may lead to better innovation                            The Advisory Committee recognizes the importance
measurements. Furthermore, firm- or establishment-                             of the international dialogue on innovation and
level data from one data source can be augmented by                            recommends that it be continued and that efforts be
matching them to corresponding data from other                                 made to ensure that new innovation measures allow
sources to obtain a more complete picture of                                   for analysis across countries.
innovation. All of these linked data are understood
best when also matched over time to create                                     Finally, the Advisory Committee recommends
longitudinal data sets. In the longitudinal records,                           support for the additional funding that will be
the 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 excess
of the growth of total inputs is attributable, in part, to innovation.




                                                                         iii
Innovation Measurement: Tracking the State of Innovation in the American Economy




HOW THE BUSINESS                                                 CONCLUSION
COMMUNITY CAN HELP
                                                                 The recommendations, if adopted, will go far in
Measuring innovation must be a collaborative                     setting this nation on a course toward effectively
process, 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 and
in innovation measurement. In particular, the                    developing better policies for innovation. The
Advisory Committee recommends that the business                  Committee calls on the government, the business
community:                                                       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 the
Advisory Committee was that innovation data
collection efforts should build on the way firms assess
the effectiveness of their innovative activities.
Individual firms, trade associations and other
organizations are important partners in developing
and testing innovation measures.


WHERE RESEARCH IS NEEDED

While our understanding of innovation has increased
over recent years, much more needs to be learned
about innovation and its measurement.
Government, business, and academic researchers
should undertake research – alone and in
collaborative efforts – to understand innovation
better. In particular, the Committee recommends
exploration 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
Innovation Measurement: Tracking the State of Innovation in the American Economy




COMPLETE LIST OF                                                 I   Develop linkages within and between existing
ADVISORY COMMITTEE                                                   data; for example, develop linkages between
                                                                     establishment-based data sets and firm-based
RECOMMENDATIONS                                                      data sets to provide both greater consistency in
                                                                     estimations and to provide researchers a broader
WHAT THE GOVERNMENT                                                  range of innovation data.
SHOULD DO
                                                                 I   Develop more robust classification methods; for
Create a stronger framework for identifying and                      example, classify firms on the basis of both
measuring 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 innovation
Better leverage existing data among the                        index when more work has been done on both
government statistical agencies to allow for the               data collection and analysis of innovation drivers.
consistent estimation of the contributions of
innovation in the GDP and productivity accounts                Support funding necessary to implement the
and to develop greater understanding of                        above recommendations.
innovation.



                                                           v
Innovation Measurement: Tracking the State of Innovation in the American Economy



HOW THE BUSINESS COMMUNITY                                         I   Assessment of the feasibility, cost, and burden of
CAN HELP                                                               developing measures of innovation intensity,
                                                                       including a review of other countries’ experience
Create, expand and assess firm and industry-level                      in this area, and consideration of a pilot project.
measures of innovation and develop best practices
for 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, as
appropriate, make innovation information                           I   Identification of ways to overcome gaps and
available 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 than
Much more needs to be learned about innovation                         otherwise similar firms with low intensities.
and its measurement. Government, business, and
academic researchers should undertake research –                   I   Assessment of the effect of collaboration on
alone and in collaborative efforts – to explore the                    innovation outcomes and identification of the
following research areas:                                              key elements of successful collaborative
                                                                       activities.
Identification and assessment of innovation
outcome 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.




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Innovation Measurement: Tracking the State of Innovation in the American Economy



I   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.




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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 expanding

I
     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 of
America’s economic expansion, we might say that                   But to look at the formal statistical record of the
innovation is our might. As the world’s economies                 United States economy, the vocabulary of innovation
flourish, it will become increasingly easy for our                is muted if not silent. To appreciate this lacuna, it is
fellow citizens and people across the globe alike to              important to understand that our system of
forget that this prosperous economic system we all                measurement was conceived largely in response to the
share—what I have referred to as “entrepreneurial                 Great Depression. Since then, our statistical agencies
capitalism,”2—is largely an American invention. To                have been remarkably competent at maintaining and
make this observation, however, is not to write a                 refining public data series. However, the framework
final chapter. Rather, reflecting on this great                   of our data infrastructure does not support or reflect
achievement—sustained long-term growth and the                    the nature of today’s dynamic economy—an
political stability it has engendered—prompts at least            economy that has undergone profound changes over
four key questions that are central to America’s next             the past seventy years. Whatever innovation is (and
economic chapter.                                                 the concept, as we shall see throughout this report,
                                                                  presents significant definitional problems), its force
The first is, what is the relationship between                    in the economy is captured only indirectly.
innovation and economic growth? Even the most
casual of observers must notice processes that yield              In an era where capital and labor seem abundant for
not only improvements in the goods and services we                at least the foreseeable future, we have come to see
encounter in our daily lives but also radically new               innovation as the most important avenue to growth.
inventions, unimaginable but a few years or months
earlier. This is the hallmark of daily economic life.             While obviously important, the nexus between
From continuous improvements in computers and                     innovation and growth is one of the least understood
service delivery to the evolution of methods to make              areas of economic life. One reason is that we have
the human gene respond to medical intervention,                   not paid sufficient attention to the question of
mankind 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 an
to the simple expectation that things will be “better,            unknown dimension of human experience. It is
faster, cheaper.” This is the axiom of innovation,                estimated that for millennia, mankind experienced
and the vocabulary of growth. If we consider the                  no growth; centuries came and went with lives
state of economic knowledge, we can look back on a                changing little. Even more importantly, global wealth
tremendous accumulated body of insight. Our                       remained stagnant—few people became richer and
dedication to understanding economic behavior and                 few poorer. If there appeared to be an expansion of
the workings of markets has led to what should be                 wealth in one locale, it usually entailed armed
appreciated as marvelously practical knowledge. As                conflict in which static goods or precious metals were
a 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 of
systems, efficient capital markets, and highly                    entrepreneurial capitalism has presented the most
                                                                  consistent expansion of wealth experienced in history
2
 Schramm, C. J. 2006. The Entrepreneurial Imperative.             – a twenty-fold increase in living standards. And, it
Harper Collins.



                                                             ix
Innovation Measurement: Tracking the State of Innovation in the American Economy



was the wealth and opportunity in the United States                   economy. We thought of ourselves as a nation
that caused nearly all nations to set aside centrally                 marked by our propensity to invent new things and
planned socialist economic orders in favor of the                     new processes. Over time, our history suggested to
dynamic and unpredictable phenomenon of one                           us that this was in our character. Frederick Jackson
form or another of capitalism.3                                       Turner, one of our most distinguished historians,
                                                                      developed the frontier hypothesis that suggested that
As suggested, however, economic growth remains                        while Americans thought that exploring and moving
something of a mystery. The chart that follows                        west was our defining frontier, this was really only a
presents an illustration of the relationship between                  metaphor for the creative pioneering that Americans
economic growth and economic knowledge. The                           feel is one of our distinctive shared attributes.
triangle, known for Professor Arnold Harberger, who
first observed the limits of economic research,
circumscribes most of what has occupied economists
over the decades. Studies in monopoly theory, labor,
public finance, industrial organization, etc., have a
shared goal, namely, advancing the optimized
efficiency of the economy so as to capture a marginal
gain in growth. But, the story of the growth that
counts, the tremendous shift over time of the nation’s
total production, is largely unaccounted for in such
optimization theories. Decades ago, Joseph
Schumpeter, the first economist to devote himself to
entrepreneurship and innovation, wrote: “This
historic and irreversible change in the way of doing
things we call ‘innovation’ and we define: innovations
are changes in production functions which cannot be
decomposed into infinitesimal steps. Add as many
mail-coaches as you please; you will never get a
railroad by so doing.” Many economists have                           Today we increasingly think of innovation, rather
documented that the most important story of                           than invention, as a word of our times. We believe
economics is that of how innovation came to be and                    our propensity to innovate is central to our character
how it is the hinge that opens the door to                            and our economy. But just what is innovation, and
economic growth.4                                                     how is it different from other phenomena that have
                                                                      been with us since our founding? Obviously, as we
The 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 or
innovation? In previous ages, invention was thought                   personality attribute—it is a defining part of our
to 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 the
3
  Baumol, W. R. Litan, and C. Schramm. 2007. Good Capitalism,         Committee was to develop a definition of innovation
Bad Capitalism and the Economics of Growth and Prosperity:            that tied “new” to “impact.” The Committee decided
Yale, 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 or
Contribution to the Theory of Economic Growth.” Quarterly
Journal 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 the
Alternatives before Us.” (New York: Committee for Economic            purpose of creating new value for customers in a way
Development, 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
Innovation Measurement: Tracking the State of Innovation in the American Economy



Considering how to define innovation prompts the                there will always be some firms and sectors that
third question, which is the focus of this report—that          innovate at a greater pace than others. Creating a
is, how do we measure innovation? For those who                 single index that treats innovation as a single
worry 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 what
important practical inquiry of our times. This report           policy steps might be appropriate to stimulate
suggests the complexity of this task. It describes the          innovation, and an error in the construction of such
issues surrounding the definition of innovation.                a unitary index could play through to disastrous
And, as might be expected, it points to what amount             consequences.
to proxy measures. As we deliberated, it became clear
that sufficient research does not exist to guide us             In the absence of a single indicator, the Committee
toward a single measure. Perhaps this will always be            proposes that the Department of Commerce take
the case. The very nature of innovation suggests that           steps toward improving, integrating, and expanding
it will never yield to a tidy and static metric. An             on its current data collection efforts in the next few
enormously complex economy produces millions of                 years, while research is undertaken to better inform
ways in which “better, faster, cheaper” comes into              the task of measuring innovation. Our statistical
play every single day.                                          system captures two of the major inputs that are
                                                                linked to the innovation process: research and
In 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 of
Committee recommendations start with a suggestion               investments, such as expenditures on information
that better measures of the growth in “total factor             technology equipment, which is certainly a factor in
productivity” – the change in productivity left over            expanding innovation. We also measure the number
after taking account of the growth of capital and               of innovations that are protected by newly-issued
labor – 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 are
conclusion we have benefited from the particular                made outside of these categories and go consistently
expertise of Professor Dale Jorgenson, one of our               unmeasured or unconnected by the current statistical
fellow 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 Committee
only accounts for a portion, albeit a large portion, of         recognizes the need to update the way we quantify
the change in the economy’s performance that might              these measurements, the frequency of our
be said to be innovation. There are other measures              measurement, and our coverage of younger firms and
that add more texture to the task but make any                  emerging industries. Further, we must develop
approach to an inclusive measure that much                      more finely calibrated measures of how firms invest
more difficult.                                                 in the inputs that become innovation, especially
                                                                human capital.
In fact, after extensive consideration, the Committee
has concluded that as much as an aggregate measure              In the absence of common public measures of the
of the entire economy’s innovation might be                     scope of innovation, many surrogates have sprung up
desirable, 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 produce
unwise given the current state of research on                   indices of innovation that should be considered as
innovation 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 report
Innovation being innovation, it would hardly be                 might be that the government absorbs several of the
established before it would have to be changed.                 most statistically valid private sector data series into
Moreover, the economy does not innovate evenly:                 its own overall measures of innovation.



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Innovation Measurement: Tracking the State of Innovation in the American Economy



The final question is the most important one of all.                    of innovation and then focus on what we know
What can we do to drive the American economy to a                       already as key factors for innovation. Without
state of continuous and sustained growth by making                      doubt, we must have people who are skilled and
our 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 real
measure how innovative the economy is, as well as                       terms that our schools, community colleges, and
determine whether the “state” of innovation is                          university-level institutions must prepare more of our
improving or decaying. It also requires that we                         young citizens to be better able to advance technical
understand the pathways of innovation lest we                           insights such that innovative products and services
develop the wrong policy interventions, either to                       continue to flow into our economy.
quicken innovation or to shift its course. While it is
difficult to say what policy should be, some things are                 If we are to grow, we need more and more people
understood and should inform policy considerations.                     ready to take entrepreneurial risk. And, we need
                                                                        them flowing from institutions attuned to producing
For 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 has
growth should be the touchstone of policy, and in the                   confirmed what scientists and entrepreneurs have
case of innovation, it is important to understand its                   known for decades: innovative breakthroughs
role. Innovation propels growth by pushing existing                     frequently come at the estuary region where different
companies to real cost reductions and new firms                         fields, not necessarily related, intersect. This means
toward growth. The United States remains unique                         we need much more cross-disciplinary training where
in its ability to grow companies. Every year roughly                    the edge between fields can be developed for the
thirty-one firms achieve “top line” revenue in excess                   innovations that lie within.
of $1 billion.5 Each one of the firms that experiences
this kind of growth takes as its basis some innovation                  In conclusion, the work of the Committee has
in 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 the
Entrepreneurial activity, both in start-ups and in                      American economy and its innovative capacity in
existing large-scale companies, is critical to the firm’s               the future. Measuring innovation is central to
success. Every entrepreneur is a party to innovation;                   understanding the economy as it evolves and
in fact it could be said that entrepreneurs are to our                  responds to growing world competition. Indeed, it is
economy as the marines are to our armed forces.                         better to travel an illuminated path toward future
Calculated risk taking, with a goal that is often only                  economic progress than to stumble in an unlit
defined as “let’s win,” is the mindset of entrepreneurs,                direction. Improvements to our measurement of
both those working on their own and those who                           innovation will help to ensure continued economic
shoulder the path-breaking and often risky task of                      strength.
changing the culture and identity of mature firms.
To make the economy more congenial to innovation
is to construct an economic culture that appreciates
what entrepreneurs do.

As we consider these observations, it is clear that our
economic ecosystem can be helpful to innovation and
its ability to flourish. Policy should first focus on
putting in place improvements to our measurement

5
 Thomas, David G. 2006. Blueprint to a Billion: 7 Essentials to
Achieve Exponential Growth. John Wiley & Sons



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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 the

I
     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 the
better the dynamics of economic growth and,                           first to issue a credit card, bought some
hopefully, avoid harmful policies and enact                           computers, wrote a program from scratch and
facilitative policies, we must design improved                        automated the entire operation. Ten years later,
measures of innovation. With this objective in mind,                  BankAmericard automated and Synovus became
the 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 process
Innovation in the 21st Century Economy.                               cards for another bank. The other bank
                                                                      accepted the offer and that started a process that
In the popular mind, innovation is often equated                      continues today. In 1983 Synovus spun off the
with invention. In some cases, this is correct –                      operation, capitalized it, and did an initial
Thomas Edison stands out as a prominent example –                     public offering (IPO). Today it is listed on the
but invention is simply one type of innovation.                       New York Stock Exchange and processes over
Innovation can be an astounding breakthrough (as                      400 million credit card accounts all over the
was often the case with Edison), a mundane shift in                   world.
process, or a subtle change in culture. Yet each type
helps generate a higher yield on resources, boosting              I   John Menzer, Vice Chair of Wal-Mart, spoke of
economic growth. Examples provided by members                         his company’s process-based gains in the areas of
of the Advisory Committee at its first meeting                        environmental sustainability, prescription drugs
illustrate 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
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 on
These examples underscore the challenges in                           the U.S. GDP show the size of the impact of
attempting 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 measures
Measurement                                                           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 firm
and around the world. Some data related to                            characteristics. It is working on improvements
innovation 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 collected
economy. Some innovation data are tracked by                          on manufacturing activities; only recently has
private sector organizations and firms, but these                     emphasis been put on non-manufacturing
efforts are also limited.         Recently, however,                  sectors. The Census Bureau, on behalf of the
government agencies, businesses and trade                             National Science Foundation (NSF), conducts
associations have been devoting more resources                        an annual firm-level survey of industrial R&D
toward the development of such data.                                  that requests data on firms’ R&D investments.
                                                                      Census has also created an Integrated
Examples of some of the U.S. statistical agency                       Longitudinal Business Database (ILBD)
programs that either currently collect innovation-                    that includes businesses with and without
related data or could be vehicles for enhanced                        employees, permitting tracking of the growth
innovation data collection and analysis through                       of start-ups and other aspects of business
linkages, 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
Innovation Measurement: Tracking the State of Innovation in the American Economy



for 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 facilitate
Dedicated innovation surveys such as the European              development of an improved and more detailed
Community’s Community Innovation Survey are                    measure of innovation and productivity;
used by statistical organizations in European Union            (2) identification of appropriate economy-wide and
and 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 that
manufacturing firms in the U.S., the surveys collect           could enable comparisons and aggregation; and
information on different varieties of innovations,             (4) identification of specific ‘holes’ in the current
including ‘new to the firm, new to the industry and            data collection system that limit our ability to
new to the world.’ They also collect extensive                 measure innovation.
information on innovation expenditures (e.g., capital
investment, training and marketing costs) and costs            The Committee received a broad array of thoughtful
of protecting innovation (e.g., patent and copyright           and substantive responses that covered the full range
costs). However, such surveys are very costly and              of categories for which comments were sought. All of
have encountered both definitional and response                the comments were considered during the
rate problems.                                                 Committee’s deliberations.

                                                               In determining the path on which to direct its
                                                               recommendations, the Advisory Committee
The Establishment of the                                       determined that its recommendations would build
Advisory Committee                                             on existing and ongoing work to the extent possible.
                                                               Where appropriate, new approaches or new data
Secretary Gutierrez formed the Advisory Committee              would be recommended but, in the interests of cost
to enlist the help of leading business representatives         and delivery time, the primary focus would be on
and academics in formulating a plan for improving              improving the scope and robustness of existing work.
innovation measurement in this country. One of the
first 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 was
For the purposes of its work, the Advisory                     awareness of the fact that many businesses do not
Committee 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 improved
Early last year, the Advisory Committee published a            innovation measures recommended by the
Federal Register request for public comments on                Committee should lead to greater understanding of
innovation measurement. The purpose of the                     the process of innovation and prove valuable to
notice was to get broad input into the work of                 policymakers in the future.
the Committee.
                                                               The next chapters detail the principles and
In the notice, the Committee asked for comments                recommendations endorsed by the Advisory
on improved or new innovation measures. The                    Committee.



                                                           3
Innovation Measurement: Tracking the State of Innovation in the American Economy




                                      Chapter Two
            GUIDING PRINCIPLES FOR INNOVATION MEASUREMENT


                                                                       When developing better ways to quantify

T
        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 of
economy. In particular, the goal is to develop better                  legislation and regulations on innovation.
estimates of the resources devoted to and value
generated by innovation by focusing not only on                  Some regulatory policies (e.g., certain tax and
measuring innovation activities and inputs but also              education policies) may explicitly support
on innovation results and outputs.                               innovation. Other policies may have the unintended
                                                                 consequence of inhibiting innovation (e.g., overly
Measuring 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 are
Innovation measurement to date has been largely                  essential for assessing the impact that regulatory
piecemeal, incomplete, and accidental (i.e., relying             policies have on innovation. Better firm-specific and
on data sets not designed for the purpose of                     economy-wide data will help reveal the impact – both
innovation measurement).                                         positive and negative – of regulatory policies on
                                                                 innovation and the environment that produces
Improving our understanding of how much is spent                 innovation.
on innovation and how much we benefit from
innovation is crucial to answering several key                     I   Because of the nature of innovation and, in
questions: Are we as a society spending too much or                    particular, the collaborative nature of the
too little on innovation? Are the places in which                      innovative process, there needs to be tolerance
focus is being given to innovation having results?                     of qualitative and subjective measures.
And what, if anything, can we do to improve our
innovative activities in the future?                             Not all measures of innovation may be quantifiable;
                                                                 and progress in developing better quantification of
The Committee’s recommendations call on the                      some dimensions of innovation may depend on
government, 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 outcomes
together to further both the understanding and the               of collaboration may be very important but also very
measurement of innovation in the economy.                        difficult, especially if such partnerships are informal
                                                                 or if the benefits are subject to spillovers (i.e., are
The Advisory Committee recommends that the work                  difficult to capture fully in a contractual
be 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 and
Data collection should be informed by what firms are                   improvement are to be gained from each stage
actually doing rather than being based solely on                       of the process.
theory. Also, to the extent possible, the burden on
firms should be minimized.



                                                             5
Innovation Measurement: Tracking the State of Innovation in the American Economy



As new innovation data are collected, they should be            economic growth rates. When compared with
refined and continually re-evaluated for their cost-            different national policy mixes, it may be possible to
effectiveness and ability to push out the frontiers of          achieve a better understanding of the impact public
knowledge about innovation and its impact on the                policies have on growth and innovation.
economy. The government needs the aid of the
researcher community in order to do so in a timely                I   A conservative approach should be taken to any
manner. And while timeliness is important in                          new data collection efforts by recognizing
understanding innovation, different measures of                       tradeoffs between costs and potential benefits
innovation may capture relatively quick-return                        and considering resource and regulatory
innovation while other measures may capture                           constraints. The implementation of pilot
innovations which require longer periods of time to                   projects to gauge the costs and benefits of new
cause 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 direct
Improved data on innovation should permit                       program costs and the cost burden imposed on
industry- and sector-specific analysis, recognizing             potential survey respondents. Many conceptual ideas
that innovation manifests itself differently in                 for new data collection need to be tested on diverse
different parts of the economy. In particular,                  industry samples of large and small or young and old
international comparisons would help explain why                firms before new surveys (or substantial changes to
different countries are experiencing different                  existing surveys) are implemented.




                                                            6
Innovation Measurement: Tracking the State of Innovation in the American Economy




                                  Chapter Three
                             WHAT GOVERNMENT SHOULD DO


                                                                Analysis (BEA) to estimate output, income and

T
        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 help
government data sets, improve linkages among them,              policymakers deal with the severe economic
collect new and better data, and expand data                    fluctuations produced by the Great Depression and
sharing/synchronization.                                        World War II. The NIPAs were not originally
                                                                designed to measure innovation or delve into the
The Advisory Committee’s recommendations for                    causes of long-term productivity growth. Today,
government action and the elements within each                  however, when policymakers are increasingly shifting
recommendation are discussed in this chapter.                   attention from short-term stabilization to long-term
                                                                economic growth, changes need to be made to
1. 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 – on
NATIONAL ECONOMY.                                               productivity growth.         Innovation is a major
                                                                determinant of productivity growth. Without
Refining the framework for measuring the                        innovation, output generally can only grow by
performance of the national economy is an essential             increasing inputs – through a combination of
element in the government’s program to measure                  expanding the labor force and increasing the
innovation. 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). The
The four major elements of this program include:                implementation by entrepreneurs, managers, and
refining 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, organizational
measures of total factor productivity; creating an              structures, or business models – enables output
innovation supplementary account; improving                     growth to exceed the growth of inputs. Measuring
service sector data; and improving the measurement              that excess growth – known as Total Factor
of intangibles (particularly intellectual property and          Productivity (TFP) growth – for the entire private
improved measures of technology licensing activity).            sector economy as well as by industry is the primary
Each of these elements is discussed in more detail              goal of this proposal. A longer-term goal, discussed
below.                                                          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 the
The NIPAs constitute the official framework used by             NIPAs and between data produced by other statistical
the Commerce Department’s Bureau of Economic                    agencies and those produced by BEA. The proposed



                                                            7
Innovation Measurement: Tracking the State of Innovation in the American Economy



new ‘architecture’ for the NIPAs would consist of a            measures of TFP will allow for rigorous comparisons
set of income statements, balance sheets, flow of              of the sources of growth across countries and over
funds statements, and productivity estimates for the           time. Such information would be valuable to
entire economy and by sector that are more accurate            policymakers trying to gauge the effectiveness of
and internally consistent. The new architecture will           national innovation policies.
make the NIPAs much more relevant to today’s
technology-driven and globalizing economy and will               I   Create a supplemental innovation account for
facilitate the publication of much more detailed and                 the National Income and Product Accounts
reliable estimates of innovation’s contribution to                   (NIPAs) in order to expand the categories of
productivity 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 a
estimation program with the NIPAs and extend their             part of the economy using the same structure as the
coverage to all industries. Doing so would require             National Income and Product Accounts without
completion of BEA’s plan to improve its industry-              being integrated with the NIPAs. Establishing a new
level statistics, including fully integrating its input-       supplemental account that is conceptually consistent
output tables with the NIPAs and incorporating new             with the NIPAs but based on data that are not as
data collected by the Census Bureau on the output              time-tested as those used in the core NIPAs helps
and intermediate inputs of services industries, as             facilitate the development of the NIPAs. For
described later in this report. Greater coordination           example, in 2006, BEA inaugurated a supplemental
between BEA and BLS will be required in other areas            account for investments in research and development
as 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&D
capital services accounts; and expansion of efforts to         supplemental account into the NIPAs.
incorporate quality adjustments and identify new
products and services for prompt inclusion in BLS’s            Developing a broad supplemental innovation
Consumer, Wholesale, and International Price Index             account for intangible assets – including estimates of
programs. 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 inputs
integrated wealth account.                                     into the NIPA product and capital accounts. Such
                                                               inputs have hitherto been classified as expenses rather
The new NIPA architecture will be flexible enough to           than as accumulated capital. Data on intangible asset
accommodate the inclusion of information from new              capital stocks and service flows could be used to
supplemental accounts and to permit the easy                   further refine estimates of the impacts of innovation
incorporation of these accounts into the proposed              on economic growth.
NIPA system. Data developed for capital stocks and
service flows for intangible assets (such as technology        The Committee calls for the development of a new
that passes among firms through licensing                      NIPA supplemental innovation account that would
agreements and other forms of intellectual property)           include intangible assets, such as investments by
can be used to parse TFP growth estimates.                     firms in research and development (conducted by
                                                               scientists and engineers as well as workers in other
The TFP growth estimates proposed by the                       occupations); human capital; patents and trade
Committee would be consistent with estimates                   secrets; copyrights, trademarks and brands; and other
currently published by the European Union, Canada,             forms of intellectual property. The development of a
Japan, and South Korea and with estimates planned              supplemental innovation account depends on the
by other countries, including Brazil, China, India,            collection of additional data on intangible
and Russia. The availability of consistently estimated         innovation assets.



                                                           8
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 from
It is widely believed that much innovation in recent            the service sector inputs, including those purchased
decades has taken place in the service sector, and this         from highly innovative industries, and will enhance
belief is bolstered by evidence (albeit based on                the quality of estimates of productivity growth
incomplete and highly aggregated data) that service             attributable to innovation.
sector productivity has increased after a long period
of 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 on
particular, manufacturing), and improved service                      work curently under way at the National
sector data collection is a necessary step toward better              Science Foundation. Consider the best way in
measurement of innovation and its impacts in the                      which to collect data on transactions involving
service 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 explore
wholesale trade in its annual surveys. Of the rest of                 whether additional identifying information
the service sector, which currently accounts for 55                   from patent and trademark applicants might
percent of GDP, the Census Bureau’s annual survey                     provide useful data.
covers only 30 percent of GDP. Put another way, the
Census Bureau does not collect annual data on one-              Statistical agencies largely focus on collecting data on
quarter of the nation’s economy.                                firms’ investments in physical capital. Little is known
                                                                about firms’ investments in intangible assets beyond
The Committee recognizes that the funds needed to               data on expenditures on scientific and engineering
implement the Census Bureau’s proposal to extend                research and development collected by the Census
annual 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 development
industry inputs have not been appropriated. The                 collected by the Census Bureau.                Data on
current 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&D
example, BEA’s efforts to develop more detailed data            are scarce, as are data on investments in
on the input/output matrices to track innovation                organizational and human capital and marketing and
across industries hinges on the Census Bureau                   brand equity.
collecting more comprehensive service sector data.
                                                                Data on patent and trademark applications and
The Committee also calls for the development of a               assignments are publicly available, but it is difficult
more nuanced classification system with finer                   for researchers to match these data to data on
granularity of data on different types of economic              applicants and assignees. Better matching would
activity in the service sector. In particular, the              help researchers develop ways to put a value on
Committee calls for improved accounting for                     intellectual property.
transfers of intangible assets (such as intellectual
property licensing and assignments) and the                     Data are similarly scarce on the income earned on
development of more detailed and quality-adjusted               intellectual property. The Bureau of Economic
price indices for services.                                     Analysis collects data on cross-border royalty
                                                                payments for intangible assets, but no data are
Since a number of service sector industries (e.g.,              currently collected on purely domestic royalty
software, consulting, and intellectual property                 revenues and payments.



                                                            9
Innovation Measurement: Tracking the State of Innovation in the American Economy



The lack of information on intangible assets’                   2. THE GOVERNMENT SHOULD BETTER
depreciation rates and how to adjust the value of               LEVERAGE EXISTING DATA AMONG THE
investments in intangibles for price inflation makes it         GOVERNMENT STATISTICAL AGENCIES TO
difficult 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 PRODUCTIVITY
estimates of innovation’s contribution to productivity          ACCOUNTS AND TO DEVELOP GREATER
growth. However, intangible asset valuation is                  UNDERSTANDING OF INNOVATION.
difficult because of the relative scarcity of directly
observable prices, and the data collection and                  Much could be learned about innovation from data
methodological challenges are daunting.                         that have already been collected if the statistical
                                                                agencies were to develop new linkages. Much of this
The Committee recommends improvements in                        work would require new legislative authority.
intangibles measurement by expanding data
collection on intangible investments beyond                       I   Develop linkages within and between existing
scientific and engineering R&D and own-account                        data; for example, develop linkages between
software development to include all resources                         establishment-based data sets and firm-based
devoted to innovation. Such improvements might be                     data sets to provide both greater consistency in
achieved by expanding NSF’s R&D survey to                             estimations and to provide researchers a broader
encompass a broader range of innovation investment                    range of innovation data.
activities. Past experience with collecting such data at
BLS and in other countries (notably Canada) could               Most U.S. industry statistics are estimated using
be 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 produces
The U.S. Patent and Trademark Office should collect             goods or performs services, for example, a store or a
additional identifying information from patent                  manufacturing plant. Statistical agencies gather data
and trademark applicants to facilitate matching                 from establishments located within the United States
application and assignment data to census and                   operating within the same industry and publish
other data sets. Such information could include                 descriptive statistics for each industry based on such
Employer Identification Numbers (with appropriate               data. Such statistics have been very useful for many
confidentiality safeguards), CUSIP numbers, DUNS                purposes, as they combine data for establishments
numbers, or other widely used firm identifiers.                 that do approximately the same things.
Collecting such additional information should
impose little additional burden on patent and                   However, many firms own or control more than one
trademark applicants and would aid the development              establishment, and those establishments may be
of patent quality indices using stock market                    located in different geographic areas and may be
valuations and other data.                                      producing different kinds of goods or performing
                                                                different kinds of services, some of which may be
The Committee further recommends that BEA and                   important to innovation. Statistics based on firm rather
the Census Bureau collaborate to collect domestic (as           than establishment data can be useful in other
well as cross-border) data on revenues from and                 contexts, especially in innovation measurement. By
expenses associated with licensing and transferring             disassembling the establishment building blocks used to
technology (patents and trade secrets), copyrights,             construct industry statistics and reassembling them into
franchise fees, and trademarks.                                 firm-based statistics, better innovation measurements
                                                                may be obtained. Furthermore, firm or establishment
Finally, the Committee calls for the development of             data from one data source can be augmented by
improved estimates of depreciation rates of intangible          matching to corresponding data from other sources to
assets and specific price indices for intangible assets.        obtain a more complete picture of innovation.



                                                           10
Innovation measurement
Innovation measurement
Innovation measurement
Innovation measurement
Innovation measurement
Innovation measurement
Innovation measurement
Innovation measurement
Innovation measurement
Innovation measurement

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Innovation measurement

  • 1. Innovation Measurement Tracking 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. Innovation Measurement Tracking 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. Innovation Measurement: Tracking the State of Innovation in the American Economy ADVISORY COMMITTEE MEMBERS CHAIR Carl Schramm President and CEO Ewing Marion Kauffman Foundation BUSINESS MEMBERS ACADEMIC MEMBERS Steve Ballmer Ashish Arora CEO Professor of Economics and Public Policy Microsoft Corporation H. John Heinz III School of Public Policy and Management David L. Bernd Carnegie Mellon University CEO Sentara Healthcare Rajesh Chandy James D. Watkins Professor of Marketing James Blanchard Carlson School of Management Retired Chairman of the Board and CEO University of Minnesota Synovus Financial Corp. Kathleen B. Cooper George Buckley Senior Fellow CEO Tower Center for Political Studies 3M Southern Methodist University Art Collins Dale W. Jorgenson Former Chairman and CEO Professor of Economics Medtronic Harvard University Michael Eskew Donald Siegel Chairman and CEO Professor and Associate Dean UPS Graduate School of Management University of California at Riverside Luther Hodges, Jr. President Phoenix Associates, Inc. John Menzer Vice-Chairman Wal-Mart Stores Samuel J. Palmisano Chairman, President and CEO IBM Corporation
  • 4. Innovation Measurement: Tracking the State of Innovation in the American Economy Acknowledgements The members of the Advisory Committee would like to acknowledge the contributions of those who have assisted us in our task. We are very appreciative of the assistance we have received from U.S. Department of Commerce personnel. We are particularly grateful for the work of Patricia Buckley, the Executive Director of the Advisory 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 for Economic Affairs. We have benefited greatly from the guidance of Cynthia A. Glassman, Under Secretary for Economic Affairs, and appreciate the assistance we have received from her staff at the Department as we have prepared this report.* We are also grateful for the support of the Department’s statistical agencies: the Census Bureau and the Bureau of Economic Analysis. In addition, we wish to thank all those who submitted comments to us in response to our Federal Register request. All of the submissions helped us greatly in thinking through our ideas and formulating 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. Innovation Measurement: Tracking the State of Innovation in the American Economy Transmittal Letter from the Committee January 2008 The Honorable Carlos M. Gutierrez Secretary of Commerce U.S. Department of Commerce Washington, DC 20230 Dear Mr. Secretary: You charged this Committee with developing “new and improved measures of innovation” in three areas: how innovation occurs in different sectors of the economy, how it is diffused across the economy, and how it affects economic growth. As chair of the Advisory Committee on Measuring Innovation in the 21st Century Economy, I am pleased to present a report that is the culmination of nearly a year’s worth of study and consideration by the members, and that we believe represents the most fundamental changes that can be made to advance our understanding of innovation. While we recognize that the American economy is changing in fundamental ways—and that most of this change relates directly to innovation—our understanding remains incomplete. Indeed, data collection and measurement, while seemingly mundane, loom large in understanding these changes. Policymakers, investors, executives, managers, consumers, and researchers require accurate and complete information in order to make informed 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 become available if the Committee’s recommendations are implemented. Sincerely yours, Carl J. Schramm Chair Advisory Committee on Measuring Innovation in the 21st Century Economy
  • 6. Innovation Measurement: Tracking the State of Innovation in the American Economy Table of Contents EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi A Message from the Chair: WHY MEASURING INNOVATION MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix Chapter One: THE CURRENT STATE OF INNOVATION MEASUREMENT AND THE ESTABLISHMENT OF THE ADVISORY COMMITTEE . . . . . . . . . . . . . . . . . . . . 1 Chapter Two: GUIDING PRINCIPLES FOR INNOVATION MEASUREMENT . . . . . . . . . . . . . . . . . . . . . . . 5 Chapter Three: WHAT THE GOVERNMENT SHOULD DO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Chapter Four: HOW THE BUSINESS COMMUNITY CAN HELP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Chapter Five: WHERE RESEARCH IS NEEDED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
  • 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 and T 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 at Commerce in September 2006 to recommend ways www.innovationmetrics.gov. to improve the measurement of innovation in the economy. In its report, the Advisory Committee The following set of principles was developed by the outlines 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 build sector researchers to foster and improve the on the way firms assess the effectiveness of their measurement of innovation in the economy. innovative activities. The first act of the Advisory Committee was to I When developing better ways to quantify establish a definition of innovation that would innovation in the marketplace, consideration identify what should be measured. The definition should be given to measuring the impact of adopted 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 needs The definition recognizes that the innovation to be to be treated less like a ‘project’ and more measured is more than simply something new; it has like an ongoing ‘dialogue.’ Learning and the added component of adding value for both improvement are to be gained from each stage customers and firms. The definition also recognizes of the process. that innovation measurement needs to extend beyond simply measuring inputs. While it is I Innovation measures should allow for analysis important 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 impact of innovation on the economy. I A conservative approach should be taken to any new data collection effort by recognizing As part of its work, the Committee published a tradeoffs between costs and potential benefits Federal Register request for public comments and and considering resource and regulatory received many helpful responses. These comments constraints. The implementation of pilot were extremely useful in informing both the guiding projects to gauge the costs and benefits of new principles and the recommendations adopted by data collection efforts is encouraged. To the i
  • 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 international Committee and should also apply to implementation dialogue related to measuring and analyzing of the Committee’s recommendations. innovation and ensure that U.S. efforts are internationally compatible to the The bulk of the Advisory Committee’s work was extent possible. devoted to developing recommendations to the Secretary of Commerce for actions to improve I Consider development of a national innovation measurement. The recommendations innovation index when more work has been endorsed by the Committee are summarized briefly done on both data collection and analysis of below and appear in a more comprehensive list at the innovation drivers. end of this summary. All of the recommendations are described 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 action SHOULD DO build on existing programs or activities. These include the U.S. National Income and Product To achieve the long-term goal of measuring the Accounts (NIPAs) which constitute the official impact of innovation on the economy, the Advisory framework used by the Commerce Department’s Committee recommends that the government create Bureau of Economic Analysis (BEA) to estimate a coordinated emphasis on innovation measurement. output, income and expenditure, trade, capital The effort will require structural refinements of formation, and wealth in the U.S. economy. The existing government data sets, the collection of new NIPAs were devised to help policymakers deal with and better data, improved linkages among statistical the severe economic fluctuations produced by the agency data sets, and expanded data Great Depression and World War II and have been sharing/synchronization authority. continually refined since then. The NIPAs now provide policymakers with an unrivaled ability to In particular, the Advisory Committee recommends adjust policy quickly and appropriately in response to that 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. Innovation Measurement: Tracking the State of Innovation in the American Economy statistical agencies upon which BEA relies for data. The Advisory Committee recommends that the The four major elements of this program are: Secretary support legislation to enable the statistical integrating industry-level estimates of total factor agencies to undertake expanded data productivity1 with the NIPAs; creating a sharing/synchronization activities. In particular, supplemental innovation account; improving service amending the law to expand access to IRS data to sector data; and improving the measurement of additional statistical agencies for the purposes of intangibles. Work on each of these four elements has reconciling the business lists and designing more already begun, although additional funding will be effective survey business frames would improve our required to move forward. understanding of the U.S. economy. The Advisory Committee also recommends that the To encourage more research by non-government statistical agencies pursue an agenda in support of the researchers, the Advisory Committee recommends development of linkages between data sets both to that the government encourage innovation research improve data consistency and to provide a richer data by making public data more transparent through the base for understanding and explaining innovation. use of data-tagging or similar methods of making Full implementation of such an agenda would require data more user-friendly and by improving access to new legislation. The statistical agencies are currently data through the creation of more public use data limited in their authority to share data and that, in files. Such efforts are being undertaken currently by turn, affects data consistency. some agencies and the Committee encourages the expansion of such efforts. In addition, the Advisory Linkages 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, while statistics are estimated using establishment-level data maintaining high standards for confidentiality. as the basic ‘building blocks.’ Such statistics have been very useful for many purposes, as they combine A major issue raised by many of the Committee data 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 was more than one establishment, and those outside the scope of the Committee’s mandate, it was establishments may be located in different geographic not fully explored. However, given the importance of areas and may be producing different kinds of goods the topic, the Committee calls on the Secretary of or performing different kinds of services, some of Commerce to convene one or more workshops or which, such as technology licensing transactions, may forums to examine innovation drivers, impediments be of particular importance to the innovation and enablers. process. Reassembling establishment-level data into firm-based statistics may lead to better innovation The Advisory Committee recognizes the importance measurements. Furthermore, firm- or establishment- of the international dialogue on innovation and level data from one data source can be augmented by recommends that it be continued and that efforts be matching them to corresponding data from other made to ensure that new innovation measures allow sources to obtain a more complete picture of for analysis across countries. innovation. All of these linked data are understood best when also matched over time to create Finally, the Advisory Committee recommends longitudinal data sets. In the longitudinal records, support for the additional funding that will be the 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 excess of the growth of total inputs is attributable, in part, to innovation. iii
  • 10. Innovation Measurement: Tracking the State of Innovation in the American Economy HOW THE BUSINESS CONCLUSION COMMUNITY CAN HELP The recommendations, if adopted, will go far in Measuring innovation must be a collaborative setting this nation on a course toward effectively process, 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 and in innovation measurement. In particular, the developing better policies for innovation. The Advisory Committee recommends that the business Committee calls on the government, the business community: 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 the Advisory Committee was that innovation data collection efforts should build on the way firms assess the effectiveness of their innovative activities. Individual firms, trade associations and other organizations are important partners in developing and testing innovation measures. WHERE RESEARCH IS NEEDED While our understanding of innovation has increased over recent years, much more needs to be learned about innovation and its measurement. Government, business, and academic researchers should undertake research – alone and in collaborative efforts – to understand innovation better. In particular, the Committee recommends exploration 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. Innovation Measurement: Tracking the State of Innovation in the American Economy COMPLETE LIST OF I Develop linkages within and between existing ADVISORY COMMITTEE data; for example, develop linkages between establishment-based data sets and firm-based RECOMMENDATIONS data sets to provide both greater consistency in estimations and to provide researchers a broader WHAT THE GOVERNMENT range of innovation data. SHOULD DO I Develop more robust classification methods; for Create a stronger framework for identifying and example, classify firms on the basis of both measuring 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 innovation Better leverage existing data among the index when more work has been done on both government statistical agencies to allow for the data collection and analysis of innovation drivers. consistent estimation of the contributions of innovation in the GDP and productivity accounts Support funding necessary to implement the and to develop greater understanding of above recommendations. innovation. v
  • 12. Innovation Measurement: Tracking the State of Innovation in the American Economy HOW THE BUSINESS COMMUNITY I Assessment of the feasibility, cost, and burden of CAN HELP developing measures of innovation intensity, including a review of other countries’ experience Create, expand and assess firm and industry-level in this area, and consideration of a pilot project. measures of innovation and develop best practices for 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, as appropriate, make innovation information I Identification of ways to overcome gaps and available 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 than Much more needs to be learned about innovation otherwise similar firms with low intensities. and its measurement. Government, business, and academic researchers should undertake research – I Assessment of the effect of collaboration on alone and in collaborative efforts – to explore the innovation outcomes and identification of the following research areas: key elements of successful collaborative activities. Identification and assessment of innovation outcome 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. Innovation Measurement: Tracking the State of Innovation in the American Economy I 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. 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 expanding I 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 of America’s economic expansion, we might say that But to look at the formal statistical record of the innovation is our might. As the world’s economies United States economy, the vocabulary of innovation flourish, it will become increasingly easy for our is muted if not silent. To appreciate this lacuna, it is fellow citizens and people across the globe alike to important to understand that our system of forget that this prosperous economic system we all measurement was conceived largely in response to the share—what I have referred to as “entrepreneurial Great Depression. Since then, our statistical agencies capitalism,”2—is largely an American invention. To have been remarkably competent at maintaining and make this observation, however, is not to write a refining public data series. However, the framework final chapter. Rather, reflecting on this great of our data infrastructure does not support or reflect achievement—sustained long-term growth and the the nature of today’s dynamic economy—an political stability it has engendered—prompts at least economy that has undergone profound changes over four key questions that are central to America’s next the past seventy years. Whatever innovation is (and economic chapter. the concept, as we shall see throughout this report, presents significant definitional problems), its force The first is, what is the relationship between in the economy is captured only indirectly. innovation and economic growth? Even the most casual of observers must notice processes that yield In an era where capital and labor seem abundant for not only improvements in the goods and services we at least the foreseeable future, we have come to see encounter in our daily lives but also radically new innovation as the most important avenue to growth. inventions, unimaginable but a few years or months earlier. This is the hallmark of daily economic life. While obviously important, the nexus between From continuous improvements in computers and innovation and growth is one of the least understood service delivery to the evolution of methods to make areas of economic life. One reason is that we have the human gene respond to medical intervention, not paid sufficient attention to the question of mankind 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 an to the simple expectation that things will be “better, unknown dimension of human experience. It is faster, cheaper.” This is the axiom of innovation, estimated that for millennia, mankind experienced and the vocabulary of growth. If we consider the no growth; centuries came and went with lives state of economic knowledge, we can look back on a changing little. Even more importantly, global wealth tremendous accumulated body of insight. Our remained stagnant—few people became richer and dedication to understanding economic behavior and few poorer. If there appeared to be an expansion of the workings of markets has led to what should be wealth in one locale, it usually entailed armed appreciated as marvelously practical knowledge. As conflict in which static goods or precious metals were a 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 of systems, efficient capital markets, and highly entrepreneurial capitalism has presented the most consistent expansion of wealth experienced in history 2 Schramm, C. J. 2006. The Entrepreneurial Imperative. – a twenty-fold increase in living standards. And, it Harper Collins. ix
  • 15. Innovation Measurement: Tracking the State of Innovation in the American Economy was the wealth and opportunity in the United States economy. We thought of ourselves as a nation that caused nearly all nations to set aside centrally marked by our propensity to invent new things and planned socialist economic orders in favor of the new processes. Over time, our history suggested to dynamic and unpredictable phenomenon of one us that this was in our character. Frederick Jackson form or another of capitalism.3 Turner, one of our most distinguished historians, developed the frontier hypothesis that suggested that As suggested, however, economic growth remains while Americans thought that exploring and moving something of a mystery. The chart that follows west was our defining frontier, this was really only a presents an illustration of the relationship between metaphor for the creative pioneering that Americans economic growth and economic knowledge. The feel is one of our distinctive shared attributes. triangle, known for Professor Arnold Harberger, who first observed the limits of economic research, circumscribes most of what has occupied economists over the decades. Studies in monopoly theory, labor, public finance, industrial organization, etc., have a shared goal, namely, advancing the optimized efficiency of the economy so as to capture a marginal gain in growth. But, the story of the growth that counts, the tremendous shift over time of the nation’s total production, is largely unaccounted for in such optimization theories. Decades ago, Joseph Schumpeter, the first economist to devote himself to entrepreneurship and innovation, wrote: “This historic and irreversible change in the way of doing things we call ‘innovation’ and we define: innovations are changes in production functions which cannot be decomposed into infinitesimal steps. Add as many mail-coaches as you please; you will never get a railroad by so doing.” Many economists have Today we increasingly think of innovation, rather documented that the most important story of than invention, as a word of our times. We believe economics is that of how innovation came to be and our propensity to innovate is central to our character how it is the hinge that opens the door to and our economy. But just what is innovation, and economic growth.4 how is it different from other phenomena that have been with us since our founding? Obviously, as we The 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 or innovation? In previous ages, invention was thought personality attribute—it is a defining part of our to 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 the 3 Baumol, W. R. Litan, and C. Schramm. 2007. Good Capitalism, Committee was to develop a definition of innovation Bad Capitalism and the Economics of Growth and Prosperity: that tied “new” to “impact.” The Committee decided Yale, 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 or Contribution to the Theory of Economic Growth.” Quarterly Journal 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 the Alternatives before Us.” (New York: Committee for Economic purpose of creating new value for customers in a way Development, 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. Innovation Measurement: Tracking the State of Innovation in the American Economy Considering how to define innovation prompts the there will always be some firms and sectors that third question, which is the focus of this report—that innovate at a greater pace than others. Creating a is, how do we measure innovation? For those who single index that treats innovation as a single worry 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 what important practical inquiry of our times. This report policy steps might be appropriate to stimulate suggests the complexity of this task. It describes the innovation, and an error in the construction of such issues surrounding the definition of innovation. a unitary index could play through to disastrous And, as might be expected, it points to what amount consequences. to proxy measures. As we deliberated, it became clear that sufficient research does not exist to guide us In the absence of a single indicator, the Committee toward a single measure. Perhaps this will always be proposes that the Department of Commerce take the case. The very nature of innovation suggests that steps toward improving, integrating, and expanding it will never yield to a tidy and static metric. An on its current data collection efforts in the next few enormously complex economy produces millions of years, while research is undertaken to better inform ways in which “better, faster, cheaper” comes into the task of measuring innovation. Our statistical play every single day. system captures two of the major inputs that are linked to the innovation process: research and In 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 of Committee recommendations start with a suggestion investments, such as expenditures on information that better measures of the growth in “total factor technology equipment, which is certainly a factor in productivity” – the change in productivity left over expanding innovation. We also measure the number after taking account of the growth of capital and of innovations that are protected by newly-issued labor – 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 are conclusion we have benefited from the particular made outside of these categories and go consistently expertise of Professor Dale Jorgenson, one of our unmeasured or unconnected by the current statistical fellow 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 Committee only accounts for a portion, albeit a large portion, of recognizes the need to update the way we quantify the change in the economy’s performance that might these measurements, the frequency of our be said to be innovation. There are other measures measurement, and our coverage of younger firms and that add more texture to the task but make any emerging industries. Further, we must develop approach to an inclusive measure that much more finely calibrated measures of how firms invest more difficult. in the inputs that become innovation, especially human capital. In fact, after extensive consideration, the Committee has concluded that as much as an aggregate measure In the absence of common public measures of the of the entire economy’s innovation might be scope of innovation, many surrogates have sprung up desirable, 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 produce unwise given the current state of research on indices of innovation that should be considered as innovation 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 report Innovation being innovation, it would hardly be might be that the government absorbs several of the established before it would have to be changed. most statistically valid private sector data series into Moreover, the economy does not innovate evenly: its own overall measures of innovation. xi
  • 17. Innovation Measurement: Tracking the State of Innovation in the American Economy The final question is the most important one of all. of innovation and then focus on what we know What can we do to drive the American economy to a already as key factors for innovation. Without state of continuous and sustained growth by making doubt, we must have people who are skilled and our 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 real measure how innovative the economy is, as well as terms that our schools, community colleges, and determine whether the “state” of innovation is university-level institutions must prepare more of our improving or decaying. It also requires that we young citizens to be better able to advance technical understand the pathways of innovation lest we insights such that innovative products and services develop the wrong policy interventions, either to continue to flow into our economy. quicken innovation or to shift its course. While it is difficult to say what policy should be, some things are If we are to grow, we need more and more people understood and should inform policy considerations. ready to take entrepreneurial risk. And, we need them flowing from institutions attuned to producing For 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 has growth should be the touchstone of policy, and in the confirmed what scientists and entrepreneurs have case of innovation, it is important to understand its known for decades: innovative breakthroughs role. Innovation propels growth by pushing existing frequently come at the estuary region where different companies to real cost reductions and new firms fields, not necessarily related, intersect. This means toward growth. The United States remains unique we need much more cross-disciplinary training where in its ability to grow companies. Every year roughly the edge between fields can be developed for the thirty-one firms achieve “top line” revenue in excess innovations that lie within. of $1 billion.5 Each one of the firms that experiences this kind of growth takes as its basis some innovation In conclusion, the work of the Committee has in 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 the Entrepreneurial activity, both in start-ups and in American economy and its innovative capacity in existing large-scale companies, is critical to the firm’s the future. Measuring innovation is central to success. Every entrepreneur is a party to innovation; understanding the economy as it evolves and in fact it could be said that entrepreneurs are to our responds to growing world competition. Indeed, it is economy as the marines are to our armed forces. better to travel an illuminated path toward future Calculated risk taking, with a goal that is often only economic progress than to stumble in an unlit defined as “let’s win,” is the mindset of entrepreneurs, direction. Improvements to our measurement of both those working on their own and those who innovation will help to ensure continued economic shoulder the path-breaking and often risky task of strength. changing the culture and identity of mature firms. To make the economy more congenial to innovation is to construct an economic culture that appreciates what entrepreneurs do. As we consider these observations, it is clear that our economic ecosystem can be helpful to innovation and its ability to flourish. Policy should first focus on putting in place improvements to our measurement 5 Thomas, David G. 2006. Blueprint to a Billion: 7 Essentials to Achieve Exponential Growth. John Wiley & Sons xii
  • 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 the I 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 the better the dynamics of economic growth and, first to issue a credit card, bought some hopefully, avoid harmful policies and enact computers, wrote a program from scratch and facilitative policies, we must design improved automated the entire operation. Ten years later, measures of innovation. With this objective in mind, BankAmericard automated and Synovus became the 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 process Innovation in the 21st Century Economy. cards for another bank. The other bank accepted the offer and that started a process that In the popular mind, innovation is often equated continues today. In 1983 Synovus spun off the with invention. In some cases, this is correct – operation, capitalized it, and did an initial Thomas Edison stands out as a prominent example – public offering (IPO). Today it is listed on the but invention is simply one type of innovation. New York Stock Exchange and processes over Innovation can be an astounding breakthrough (as 400 million credit card accounts all over the was often the case with Edison), a mundane shift in world. process, or a subtle change in culture. Yet each type helps generate a higher yield on resources, boosting I John Menzer, Vice Chair of Wal-Mart, spoke of economic growth. Examples provided by members his company’s process-based gains in the areas of of the Advisory Committee at its first meeting environmental sustainability, prescription drugs illustrate 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. 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 on These examples underscore the challenges in the U.S. GDP show the size of the impact of attempting 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 measures Measurement 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 firm and around the world. Some data related to characteristics. It is working on improvements innovation 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 collected economy. Some innovation data are tracked by on manufacturing activities; only recently has private sector organizations and firms, but these emphasis been put on non-manufacturing efforts are also limited. Recently, however, sectors. The Census Bureau, on behalf of the government agencies, businesses and trade National Science Foundation (NSF), conducts associations have been devoting more resources an annual firm-level survey of industrial R&D toward the development of such data. that requests data on firms’ R&D investments. Census has also created an Integrated Examples of some of the U.S. statistical agency Longitudinal Business Database (ILBD) programs that either currently collect innovation- that includes businesses with and without related data or could be vehicles for enhanced employees, permitting tracking of the growth innovation data collection and analysis through of start-ups and other aspects of business linkages, 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. Innovation Measurement: Tracking the State of Innovation in the American Economy for 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 facilitate Dedicated innovation surveys such as the European development of an improved and more detailed Community’s Community Innovation Survey are measure of innovation and productivity; used by statistical organizations in European Union (2) identification of appropriate economy-wide and and 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 that manufacturing firms in the U.S., the surveys collect could enable comparisons and aggregation; and information on different varieties of innovations, (4) identification of specific ‘holes’ in the current including ‘new to the firm, new to the industry and data collection system that limit our ability to new to the world.’ They also collect extensive measure innovation. information on innovation expenditures (e.g., capital investment, training and marketing costs) and costs The Committee received a broad array of thoughtful of protecting innovation (e.g., patent and copyright and substantive responses that covered the full range costs). However, such surveys are very costly and of categories for which comments were sought. All of have encountered both definitional and response the comments were considered during the rate problems. Committee’s deliberations. In determining the path on which to direct its recommendations, the Advisory Committee The Establishment of the determined that its recommendations would build Advisory Committee on existing and ongoing work to the extent possible. Where appropriate, new approaches or new data Secretary Gutierrez formed the Advisory Committee would be recommended but, in the interests of cost to enlist the help of leading business representatives and delivery time, the primary focus would be on and academics in formulating a plan for improving improving the scope and robustness of existing work. innovation measurement in this country. One of the first 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 was For the purposes of its work, the Advisory awareness of the fact that many businesses do not Committee 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 improved Early last year, the Advisory Committee published a innovation measures recommended by the Federal Register request for public comments on Committee should lead to greater understanding of innovation measurement. The purpose of the the process of innovation and prove valuable to notice was to get broad input into the work of policymakers in the future. the Committee. The next chapters detail the principles and In the notice, the Committee asked for comments recommendations endorsed by the Advisory on improved or new innovation measures. The Committee. 3
  • 21. Innovation Measurement: Tracking the State of Innovation in the American Economy Chapter Two GUIDING PRINCIPLES FOR INNOVATION MEASUREMENT When developing better ways to quantify T 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 of economy. In particular, the goal is to develop better legislation and regulations on innovation. estimates of the resources devoted to and value generated by innovation by focusing not only on Some regulatory policies (e.g., certain tax and measuring innovation activities and inputs but also education policies) may explicitly support on innovation results and outputs. innovation. Other policies may have the unintended consequence of inhibiting innovation (e.g., overly Measuring 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 are Innovation measurement to date has been largely essential for assessing the impact that regulatory piecemeal, incomplete, and accidental (i.e., relying policies have on innovation. Better firm-specific and on data sets not designed for the purpose of economy-wide data will help reveal the impact – both innovation measurement). positive and negative – of regulatory policies on innovation and the environment that produces Improving our understanding of how much is spent innovation. on innovation and how much we benefit from innovation is crucial to answering several key I Because of the nature of innovation and, in questions: Are we as a society spending too much or particular, the collaborative nature of the too little on innovation? Are the places in which innovative process, there needs to be tolerance focus is being given to innovation having results? of qualitative and subjective measures. And what, if anything, can we do to improve our innovative activities in the future? Not all measures of innovation may be quantifiable; and progress in developing better quantification of The Committee’s recommendations call on the some dimensions of innovation may depend on government, 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 outcomes together to further both the understanding and the of collaboration may be very important but also very measurement of innovation in the economy. difficult, especially if such partnerships are informal or if the benefits are subject to spillovers (i.e., are The Advisory Committee recommends that the work difficult to capture fully in a contractual be 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 and Data collection should be informed by what firms are improvement are to be gained from each stage actually doing rather than being based solely on of the process. theory. Also, to the extent possible, the burden on firms should be minimized. 5
  • 22. Innovation Measurement: Tracking the State of Innovation in the American Economy As new innovation data are collected, they should be economic growth rates. When compared with refined and continually re-evaluated for their cost- different national policy mixes, it may be possible to effectiveness and ability to push out the frontiers of achieve a better understanding of the impact public knowledge about innovation and its impact on the policies have on growth and innovation. economy. The government needs the aid of the researcher community in order to do so in a timely I A conservative approach should be taken to any manner. And while timeliness is important in new data collection efforts by recognizing understanding innovation, different measures of tradeoffs between costs and potential benefits innovation may capture relatively quick-return and considering resource and regulatory innovation while other measures may capture constraints. The implementation of pilot innovations which require longer periods of time to projects to gauge the costs and benefits of new cause 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 direct Improved data on innovation should permit program costs and the cost burden imposed on industry- and sector-specific analysis, recognizing potential survey respondents. Many conceptual ideas that innovation manifests itself differently in for new data collection need to be tested on diverse different parts of the economy. In particular, industry samples of large and small or young and old international comparisons would help explain why firms before new surveys (or substantial changes to different countries are experiencing different existing surveys) are implemented. 6
  • 23. Innovation Measurement: Tracking the State of Innovation in the American Economy Chapter Three WHAT GOVERNMENT SHOULD DO Analysis (BEA) to estimate output, income and T 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 help government data sets, improve linkages among them, policymakers deal with the severe economic collect new and better data, and expand data fluctuations produced by the Great Depression and sharing/synchronization. World War II. The NIPAs were not originally designed to measure innovation or delve into the The Advisory Committee’s recommendations for causes of long-term productivity growth. Today, government action and the elements within each however, when policymakers are increasingly shifting recommendation are discussed in this chapter. attention from short-term stabilization to long-term economic growth, changes need to be made to 1. 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 – on NATIONAL ECONOMY. productivity growth. Innovation is a major determinant of productivity growth. Without Refining the framework for measuring the innovation, output generally can only grow by performance of the national economy is an essential increasing inputs – through a combination of element in the government’s program to measure expanding the labor force and increasing the innovation. 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). The The four major elements of this program include: implementation by entrepreneurs, managers, and refining 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, organizational measures of total factor productivity; creating an structures, or business models – enables output innovation supplementary account; improving growth to exceed the growth of inputs. Measuring service sector data; and improving the measurement that excess growth – known as Total Factor of intangibles (particularly intellectual property and Productivity (TFP) growth – for the entire private improved measures of technology licensing activity). sector economy as well as by industry is the primary Each of these elements is discussed in more detail goal of this proposal. A longer-term goal, discussed below. 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 the The NIPAs constitute the official framework used by NIPAs and between data produced by other statistical the Commerce Department’s Bureau of Economic agencies and those produced by BEA. The proposed 7
  • 24. Innovation Measurement: Tracking the State of Innovation in the American Economy new ‘architecture’ for the NIPAs would consist of a measures of TFP will allow for rigorous comparisons set of income statements, balance sheets, flow of of the sources of growth across countries and over funds statements, and productivity estimates for the time. Such information would be valuable to entire economy and by sector that are more accurate policymakers trying to gauge the effectiveness of and internally consistent. The new architecture will national innovation policies. make the NIPAs much more relevant to today’s technology-driven and globalizing economy and will I Create a supplemental innovation account for facilitate the publication of much more detailed and the National Income and Product Accounts reliable estimates of innovation’s contribution to (NIPAs) in order to expand the categories of productivity 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 a estimation program with the NIPAs and extend their part of the economy using the same structure as the coverage to all industries. Doing so would require National Income and Product Accounts without completion of BEA’s plan to improve its industry- being integrated with the NIPAs. Establishing a new level statistics, including fully integrating its input- supplemental account that is conceptually consistent output tables with the NIPAs and incorporating new with the NIPAs but based on data that are not as data collected by the Census Bureau on the output time-tested as those used in the core NIPAs helps and intermediate inputs of services industries, as facilitate the development of the NIPAs. For described later in this report. Greater coordination example, in 2006, BEA inaugurated a supplemental between BEA and BLS will be required in other areas account for investments in research and development as 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&D capital services accounts; and expansion of efforts to supplemental account into the NIPAs. incorporate quality adjustments and identify new products and services for prompt inclusion in BLS’s Developing a broad supplemental innovation Consumer, Wholesale, and International Price Index account for intangible assets – including estimates of programs. 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 inputs integrated wealth account. into the NIPA product and capital accounts. Such inputs have hitherto been classified as expenses rather The new NIPA architecture will be flexible enough to than as accumulated capital. Data on intangible asset accommodate the inclusion of information from new capital stocks and service flows could be used to supplemental accounts and to permit the easy further refine estimates of the impacts of innovation incorporation of these accounts into the proposed on economic growth. NIPA system. Data developed for capital stocks and service flows for intangible assets (such as technology The Committee calls for the development of a new that passes among firms through licensing NIPA supplemental innovation account that would agreements and other forms of intellectual property) include intangible assets, such as investments by can be used to parse TFP growth estimates. firms in research and development (conducted by scientists and engineers as well as workers in other The TFP growth estimates proposed by the occupations); human capital; patents and trade Committee would be consistent with estimates secrets; copyrights, trademarks and brands; and other currently published by the European Union, Canada, forms of intellectual property. The development of a Japan, and South Korea and with estimates planned supplemental innovation account depends on the by other countries, including Brazil, China, India, collection of additional data on intangible and Russia. The availability of consistently estimated innovation assets. 8
  • 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 from It is widely believed that much innovation in recent the service sector inputs, including those purchased decades has taken place in the service sector, and this from highly innovative industries, and will enhance belief is bolstered by evidence (albeit based on the quality of estimates of productivity growth incomplete and highly aggregated data) that service attributable to innovation. sector productivity has increased after a long period of 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 on particular, manufacturing), and improved service work curently under way at the National sector data collection is a necessary step toward better Science Foundation. Consider the best way in measurement of innovation and its impacts in the which to collect data on transactions involving service 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 explore wholesale trade in its annual surveys. Of the rest of whether additional identifying information the service sector, which currently accounts for 55 from patent and trademark applicants might percent of GDP, the Census Bureau’s annual survey provide useful data. covers only 30 percent of GDP. Put another way, the Census Bureau does not collect annual data on one- Statistical agencies largely focus on collecting data on quarter of the nation’s economy. firms’ investments in physical capital. Little is known about firms’ investments in intangible assets beyond The Committee recognizes that the funds needed to data on expenditures on scientific and engineering implement the Census Bureau’s proposal to extend research and development collected by the Census annual 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 development industry inputs have not been appropriated. The collected by the Census Bureau. Data on current 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&D example, BEA’s efforts to develop more detailed data are scarce, as are data on investments in on the input/output matrices to track innovation organizational and human capital and marketing and across industries hinges on the Census Bureau brand equity. collecting more comprehensive service sector data. Data on patent and trademark applications and The Committee also calls for the development of a assignments are publicly available, but it is difficult more nuanced classification system with finer for researchers to match these data to data on granularity of data on different types of economic applicants and assignees. Better matching would activity in the service sector. In particular, the help researchers develop ways to put a value on Committee calls for improved accounting for intellectual property. transfers of intangible assets (such as intellectual property licensing and assignments) and the Data are similarly scarce on the income earned on development of more detailed and quality-adjusted intellectual property. The Bureau of Economic price indices for services. Analysis collects data on cross-border royalty payments for intangible assets, but no data are Since a number of service sector industries (e.g., currently collected on purely domestic royalty software, consulting, and intellectual property revenues and payments. 9
  • 26. Innovation Measurement: Tracking the State of Innovation in the American Economy The lack of information on intangible assets’ 2. THE GOVERNMENT SHOULD BETTER depreciation rates and how to adjust the value of LEVERAGE EXISTING DATA AMONG THE investments in intangibles for price inflation makes it GOVERNMENT STATISTICAL AGENCIES TO difficult 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 PRODUCTIVITY estimates of innovation’s contribution to productivity ACCOUNTS AND TO DEVELOP GREATER growth. However, intangible asset valuation is UNDERSTANDING OF INNOVATION. difficult because of the relative scarcity of directly observable prices, and the data collection and Much could be learned about innovation from data methodological challenges are daunting. that have already been collected if the statistical agencies were to develop new linkages. Much of this The Committee recommends improvements in work would require new legislative authority. intangibles measurement by expanding data collection on intangible investments beyond I Develop linkages within and between existing scientific and engineering R&D and own-account data; for example, develop linkages between software development to include all resources establishment-based data sets and firm-based devoted to innovation. Such improvements might be data sets to provide both greater consistency in achieved by expanding NSF’s R&D survey to estimations and to provide researchers a broader encompass a broader range of innovation investment range of innovation data. activities. Past experience with collecting such data at BLS and in other countries (notably Canada) could Most U.S. industry statistics are estimated using be 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 produces The U.S. Patent and Trademark Office should collect goods or performs services, for example, a store or a additional identifying information from patent manufacturing plant. Statistical agencies gather data and trademark applicants to facilitate matching from establishments located within the United States application and assignment data to census and operating within the same industry and publish other data sets. Such information could include descriptive statistics for each industry based on such Employer Identification Numbers (with appropriate data. Such statistics have been very useful for many confidentiality safeguards), CUSIP numbers, DUNS purposes, as they combine data for establishments numbers, or other widely used firm identifiers. that do approximately the same things. Collecting such additional information should impose little additional burden on patent and However, many firms own or control more than one trademark applicants and would aid the development establishment, and those establishments may be of patent quality indices using stock market located in different geographic areas and may be valuations and other data. producing different kinds of goods or performing different kinds of services, some of which may be The Committee further recommends that BEA and important to innovation. Statistics based on firm rather the Census Bureau collaborate to collect domestic (as than establishment data can be useful in other well as cross-border) data on revenues from and contexts, especially in innovation measurement. By expenses associated with licensing and transferring disassembling the establishment building blocks used to technology (patents and trade secrets), copyrights, construct industry statistics and reassembling them into franchise fees, and trademarks. firm-based statistics, better innovation measurements may be obtained. Furthermore, firm or establishment Finally, the Committee calls for the development of data from one data source can be augmented by improved estimates of depreciation rates of intangible matching to corresponding data from other sources to assets and specific price indices for intangible assets. obtain a more complete picture of innovation. 10