In January 2011, President Obama signed into law the America COMPETES Reauthorization Act of 2010. The goal of the act was to invest in innovation through R&D and to improve the competitiveness of the United States. However, increasing investment in and of itself is unlikely to produce desired results. We need to understand who should increase spending and how. NCSES is well-positioned to provide that understanding through its data on firm innovative activities in the Survey of Industrial Research and Development (SIRD) (1987-2007), and its successor, the Business R&D and Innovation Survey (BRDIS) (2008-2011).

The proposed study empirically examines the impact of US firms' innovative activities on economic outcomes by matching a new measure of economic performance, firms' Research Quotient (RQ) to the SIRD and BRDIS data. This matching enables us to test major hypotheses within the economics of innovation literature that have been unresolved previously due to lack of reliable firm-level measures of innovative outcomes. These hypotheses pertain to the impact of firm size, market structure, firm heterogeneity, innovation type, innovation source, and appropriability on the incentives to conduct R&D as well as the effectiveness of that R&D.

Broader Impact. At the policy-level, the study provides theoretically motivated and empirically rigorous insights for directing investment in innovation for the America COMPETES Reorganization Act of 2010: characteristics of firms likely to generate the highest returns to that investment (who). Second, for practitioners, the study offers firms prescriptions for increasing their R&D effectiveness (how). Thus the study has the potential to increase the aggregate R&D productivity in the US. Finally, for academics, the study will answer long-standing questions in the economics of innovation literature to support future theory development on the optimal conditions for innovation.

Project Report

We conducted two research projects that exploited the NSF SIRD and BRDIS data bases combined with a new measure of R&D productivity (RQ) to resolve long-standing questions in the innovation literature. Each is summarized separately. Outsourced R&D and GDP Growth Abstract: In January 2011, President Obama signed into law the "America COMPETES Reauthorization Act of 2010", whose goal was to restore US competitiveness through investment in R&D. This act reflects the belief (and corresponding economic theory) that technological progress drives economic growth. However coarse comparison between R&D and GDP growth over the past forty years indicates that scientific labor has increased 2.5 times, while GDP growth has at best remained stagnant. The leading theory to explain the disconnect holds that R&D has gotten harder. We develop and test an alternative view that firms have become worse at it. Using a novel measure, RQ, we show a 65% decline in R&D productivity over the forty year period. Using NSF SIRD data, we find that the only R&D practice exhibiting as dramatic a trend is R&D outsourcing—which increases 20.5X over the same period. Further analysis reveals outsourced R&D is unproductive for the funding firm. Thus outsourced R&D appears to be a key culprit in the decline of R&D productivity (and by extension economic growth). We find no evidence that R&D has gotten harder—the productivity of internal R&D is essentially unchanged. All Hail Large Firm Innovation: Reconciling the Firm Size and Innovation Debate Abstract: Since Schumpeter, there has been a long-standing debate regarding the optimal firm size for innovation. Empirical results have settled into a puzzle: studies consistently find that R&D spending increases with scale, however studies of R&D productivity indicate product and patent counts decrease with scale. Thus firms appear irrational: spending is decreasing in productivity. We propose the puzzle stems from measurement problems. Drawing on recent theory suggesting that size affects the type of R&D that firms conduct, we propose that product and patent counts exclude the majority of large firm innovation (incremental and process). To date we have been unable to test these more nuanced views because we lacked firm-level data on the type of R&D firms conduct. Additionally we lacked a universal measure of R&D productivity that could accommodate all types of R&D. Using recently available NSF BRDIS survey data to solve the former problem and a recent measure of R&D productivity (RQ) to solve that latter problem, we find that both R&D spending and R&D productivity increase with scale. We further find that while large firms and small firms differ in the types of R&D they conduct, there is no type whose returns decrease in scale—there are merely types for which the small firm penalty is less severe. This raises a new question: why do small firms conduct R&D? The answer appears to be they rely on spillovers. Thus not only do large firms provide the bulk of innovation in the economy, their spillovers are a key input to small firms’ innovation.

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Washington University
Saint Louis
United States
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