WHY MEASURE INNOVATION?

The underlying analytical framework used in this study posits that new and improved products and processes, new organizational methods, and new marketing concepts and strategies are key measures of the output of a country’s innovation system. Innovation affects both economic performance measures, such as productivity growth, profits, and job creation, and noneconomic variables, such as life expectancy and environmental response. Meanwhile, the rate of innovation responds to inputs such as R&D spending; the availability of science, technology, engineering, and mathematics (STEM) labor; regulatory policies; and other variables.3

From this perspective, the panel strongly believes that NCSES needs to improve its ability to measure and track innovation. Improved measures of innovation are necessary to assess the impact of federal, state, and local innovation policies, such as the amount and direction of federal R&D funding, support for STEM education at the graduate level, and regulation of new products and services. In addition, having good measures of innovation output facilitates comparison of the United States with other countries in a key area that promotes economic growth. NCSES’s mandate in the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science (America COMPETES) Act (U.S. House of Representatives, 2010) includes the curation and dissemination of data on “United States competitiveness in science, engineering, technology, and research and development.” Innovation is an important element for such comparisons. Without improved direct indicators of innovation outputs, policy analysis will continue to rely on imperfect indicators of innovation, such as number of patents granted; inputs to innovative activities, such as R&D spending and number of STEM workers; and broad performance measures for the economy, such as productivity.

A voluminous literature addresses the historical link between patents and innovation, and the topic remains controversial today. However, there is little doubt that the more than doubling of patent grants over the past 20 years—from 96,511 in 1991 to 224,505 in 2011—did not reflect an equally sharp rise in the volume of innovation. As recent litigation has shown, multiple patents have become a bargaining chip rather than an accurate measure of innovation output. Moreover, a recent NCSES InfoBrief suggests that patents are less important to companies than other forms of intellectual property protection (Jankowski, 2012). Based on data from the 2008 BRDIS, firms across virtually every industry are much more likely to cite trademarks, copyrights, and trade secrets than either design or utility patents as important for intellectual property rights. Also, the propensity to patent is highly industry dependent.

Similarly, input measures such as R&D spending cannot adequately substitute for measures of innovation output, especially if policy makers are concerned about government funds being used efficiently. Moreover, recent evidence shows that most firms that report innovations do not report R&D spending. For example, Table 4-1, drawn from the 2011 BRDIS results, shows that 79 percent of all firms with new or significantly improved products or processes did not report R&D spending. In other words, focusing only on firms that report R&D spending raises the possibility of missing much of the innovation taking place in the economy.4

Many innovations developed and introduced by start-up companies may not be associated with formal R&D, or R&D may not be recorded as such because start-ups often have no revenues against which to record expenses. More broadly, advances in information and communication technologies and the importance of innovations such as Google’s search service, Amazon’s e-commerce website, and Apple’s iTunes store signal how the nature of the innovation process has changed, increasingly depending on investments in innovative assets other than R&D (e.g., data, organizational know-how) and with take-up primarily in the service sector. Indeed, in fiscal year 2006, the year before the iPhone was introduced, Apple reported spending less than 3 percent of its revenues on R&D—relatively low for a technology company.5

Finally, broad measures of economic performance, such as productivity, do contain information about the country’s innovation system, especially over longer periods such as decades. However, productivity growth is a weak signal in the short run because it is affected by external factors such as the business cycle and by external factors such as the availability of finance.

The panel acknowledges that developing useful measures of innovation output is far more difficult than measuring inputs or patents, for example. The space of economically significant innovations is both diverse and expanding. Inno-

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3One prominent model is presented by Crépon and colleagues (1998). This three-equation model has the following structure: (1) RD = f (Xr); (2) Innovation = g(RD, Xi); and (3) Productivity/other economic output = h(Innovation, Xp), where X’s are vectors of other factors relevant to the output (see also Mairesse and Mohnen, 2010; OECD, 2009).

4Sectors in which more than 50 percent of firms indicated that they were engaged in either product or process innovation between 2009 and 2011 were manufacturing—petroleum and coal products; chemicals (particularly basic chemicals; soap cleaning compound, and toilet preparation; paint, coating, adhesive, and other chemicals); machinery (particularly agricultural implement; engine, turbine, and power transmission equipment); computer and electronic products (particularly communications equipment; semiconductor and other electronic components; navigational, measuring, electromedical, and control instruments; other measuring and controlling devices); and transportation equipment (particularly guided missile, space vehicle, and related parts); or nonmanufacturing—information (particularly software publishers). See Appendixes H-K for specific details.

5Apple’s R&D/sales ratio has historically been relatively low compared with companies such as Google, Microsoft, Intel, and Samsung. For example, Apple’s R&D/sales ratio was at 2.27 percent in fiscal year 2012, approximately one-third of Samsung’s R&D/sales ratio. However, Apple may have benefited from R&D spending by suppliers such as Samsung and Intel.



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