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5 Measuring Research and Development Services A simple definition of “research and experimental development”—more generally referred to as research and development (R&D)—comes from the Organisation for Economic Co-operation and Development (2002, p. 30): “creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications.” In its Business Research and Development and Innovation Survey (BRDIS), the National Center for Science and Engineering Statistics (NCSES) expands on this definition, providing the following guidance (U.S. Department of Commerce, 2011, p. 3): R&D [research and development] is planned, creative work aimed at discovering new knowledge or developing new or significantly improved goods and services. This includes (a) activities aimed at acquiring new knowledge or understanding without specific immediate commercial applications or uses (basic research); (b) activities aimed at solving a specific problem or meeting a specific commercial objective (applied research); and (c) systematic use of research and practical experience to produce new or significantly improved goods, services, or processes (development). The term research and development does NOT include expenditures for:  costs for routine product testing, quality control, and technical services unless they are an integral part of an R&D project;  market research;  efficiency surveys or management studies;  literary, artistic, or historical projects, such as films, music, or books and other publications; and  prospecting or exploration for natural resources. One important part of R&D is R&D services, which are services for the performance of R&D by one organization for another. R&D services are for the most part provided by companies and organizations in biotechnology; contract research (including physical, engineering, and life sciences firms); and professional, scientific, and technical areas (including social sciences and humanities). These are companies or organizations categorized under the North American Industrial Classification System (NAICS) code 5417 (scientific research and development services). Specifying specific NAICS codes for R&D services (as does BRDIS) is important, since firms in almost any industry can buy or sell R&D services. For example, Boeing can buy services to fill a gap in its R&D program for wing design; Wal-Mart can sell its 27

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knowledge, based on R&D, on supply chains: extraction firms can sell or buy R&D services related to extraction. POLICY RELEVANCE NCSES’s indicators are already used to inform many policy issues. Since 1953, the National Science Foundation (NSF) has published statistics on industrial R&D, including: R&D expenditures and performance by industrial sector, state and government agency; and company R&D performed outside the United States.1 These data are useful for informing federal budget decisions, including measurements of R&D budgets at federal agencies (defense and nondefense) and comparisons of federal spending on physical and biological sciences. Still missing from these statistics, however, are some important measures of R&D and related spillover effects that would help to determine the effects of scientific investment on socioeconomic outcomes. Policy makers would benefit from statistics that address such questions as: What effect does federal spending on R&D have on innovation and economic health, and over what time frame? What is the international balance of trade in R&D services? How much R&D do U.S. multinational companies carry out outside the United States, and how much R&D do foreign multinational companies carry out in the United States? In this report, we focus on ways of improving measurement of R&D services; the panel expects to offer recommendations on other enhancements to NCSES’s R&D indicators in our final report. CURRENT AND NEEDED DATA Currently, R&D services (sometimes called knowledge-intensive services) and foreign direct investment of R&D performed by affiliates are published in the biennial report of the National Science Board, Science and Engineering Indicators (SEI). For these reports, IHS Global Insight provides the tabulations on the trade balance in commercial knowledge-intensive services, while the Bureau of Economic Analysis (BEA) provides the data on international trade in research, development, and testing services. It would be useful if NCSES could include questions on its 2011 BRDIS that allow the development of comparable estimates to those that were historically developed by other agencies. The surveys on international transactions done by BEA and R&D surveys done by NCSES follow different guidance: BEA follows the International Monetary Fund (IMF) (2011) Balance of Payments (BOP) Manual and NCSES follows the Frascati Manual (Organisation for Economic Co-operation and Development, 2002). However, the two approaches are not far apart. The BOP Manual includes some R&D and intellectual property elements that are consistent with the Frascati Manual. Therefore, geographic and ownership scope of the BEA’s international transactions surveys and BRDIS are conceptually close. For example, BEA’s international transactions surveys cover any company with activities in the United States, regardless of ownership. Transaction surveys cover transaction of U.S.-located units of foreign multinational enterprises with entities outside the United States, including transactions with their own foreign parents, and affiliated and unaffiliated trade. Similarly, for the United States, the survey covers affiliated and unaffiliated trade and transactions by purely domestic companies (no relationship with any multinational enterprise). BRDIS also covers any company with activities in the United 1 For a useful catalog of these data tables, see the Industrial Research and Development Data System, available at http://www.nsf.gov/statistics/iris/history_data.cfm [December 2011]. 28

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States, regardless of ownership, and foreign affiliates of U.S. multinational enterprises. The 2008, 2009, and 2010 BRDIS did not allow NCSES to collect all of the elements described above, but the 2011 questionnaire2 is expected to be more comprehensive in this dimension— collecting data on R&D production, funding, and transactions. In its surveys, BRDIS treats the foreign parent differently from both BEA’s trade surveys and BEA’s surveys of foreign direct investment. Other differences between BRDIS and BEA data on international balance of payments in R&D trade include: BEA’s testing services, which are part of the research, development, and testing measure may include R&D and non-R&D components; and R&D, which is treated basically by NCSES as a cost measure, while transactions are treated closer to market values. Moris (2009, p. 184) suggests a matrix to parse out data from trade surveys and R&D surveys (including BRDIS). The panel believes that NCSES can provide these estimates and, if necessary, include appropriate questions on BRDIS in 2011 and subsequent years. Data would be available to produce statistics on payments and receipts for R&D services involving U.S. company affiliates at home and abroad, and how those data differ, if at all, from the BEA measures. Similar information on foreign company affiliates from other sources could be used for parallel comparisons.3 NCSES could consider developing two series, payments and receipts of R&D services, for three to five leading countries. The resulting statistics would show what knowledge creation is outsourced and which countries are buying U.S. knowledge. This information would enable users to track trends over time and have a better understanding of the knowledge flows and R&D network formations. Over time, an interesting result of this exercise would be answers to a range of questions: What is the United States learning from other countries and what are other countries learning from the United States? In what technological areas are other countries accelerating development, using knowledge sourced in the United States? The data could also be used in regression analysis to answer another important question: What impact does the international flow of R&D have on U.S. economic performance? Users of the data on international flows of R&D services are likely to be interested to see how emerging economies are advancing in R&D capacity, in what fields are U.S. companies sourcing or outsourcing R&D and if it is increasingly sourced or outsourced in specific countries, and which countries 5-10 years from now—may be the hub of new scientific knowledge—possibly countries in Latin America, Sub-Saharan Africa or the Middle East. Another topic of interest is foreign direct investment of R&D. Recent data (Barefoot and Mataloni, 2011, especially Table 7) show that U.S. multinational corporations increased their share of R&D overseas from 14 percent in 1999 to 18 percent in 2009 and increased total employment overseas by 2 million while cutting U.S. employment by 0.8 million. The rational given for this shift in R&D performance outside the United States is that companies want to do R&D in the markets they serve. Statistics on trade in R&D services and the location of affiliated R&D performance together give a comprehensive outlook on sources of new knowledge. 2 The 2011 BRDIS was scheduled to be fielded early in 2012. 3 For example, see Eurostat 2010 statistics, available at http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes [December 2011]. Also see statistics for Germany (Deutsche Bank Research, 2011) NASSCOM, Booz & Co. published statistics and on the Indian engineering R&D offshoring market (NASSSCOM and Booz & Co. [2010]. These two reports cite private company estimates, as well as published Eurostat statistics. 29

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SUMMARY AND RECOMMENDATION BRDIS has data on domestic and foreign activities of firms and can provide a much more elaborate picture of R&D activities than has previously been possible or has been fully exploited. Specifically, BRDIS offers more information on R&D service production and flows, in the United States and in U.S. firms abroad, than has been published. Understanding R&D services is particularly important because the developed economies are dominated by service industries. BRDIS data can also support measures of payments and receipts for R&D services abroad, by leading countries, which is critically important for policy purposes. NCSES is expanding data linking activities to match BRDIS microdata with BEA survey data on U.S. foreign direct investment microdata. The agency also has fruitful interagency collaboration with BEA to integrate R&D into the system of national accounts. In its final report, the panel expects to offer specific recommendations on how to use these collaborations to produce new and better STI indicators. RECOMMENDATION 4: The National Center for Science and Engineering Statistics should more fully use data from its Business Research and Development and Innovation Survey to provide indicators on payments and receipts for R&D services between the United States and other countries. 30