This research develops measures of firms? resources devoted to the development of new products and business models in the financial services industry, an activity called ?finance R&D.? The work helps fill a vast gap in our knowledge of the investment and innovation process for a large and important sector of economic activity in the United States. Traditional R&D spending captures the cost of the ?work done? by scientists and engineers because the innovation process in manufacturing is well understood to originate in a laboratory. But where do financial innovations, such as credit default swaps, derivatives, electronic payment systems, ATMs, and the like originate? A recent review of the empirical literature on financial innovation (Frame and White 2004) suggests little is known about the process.
The novel aspect of our research will be to further develop available measures of intangible investment and capital by exploiting Bureau of Labor Statistics (BLS) employer-based datasets on employment and wages by detailed occupation and industry. The BLS data will be used in combination with information obtained from semi structured interviews with industry executives to build estimates of the ?work done? by the employees (or contractors) who conduct the design and development activity in (or for) financial services firms. The interviews will leverage the Conference Board?s extensive network of business contacts to obtain the required information as well as to generally expand our knowledge of the innovation process in financial services industries. The resulting industry-level series for finance R&D will both supplement traditional R&D measures and enhance the Corrado, Hulten, and Sichel (2006) macroeconomic estimates of the contribution of intangible capital to U.S. economic growth.
Broader impacts: The need for better metrics of innovation and the knowledge economy was underscored by the Advisory Committee on Innovation established by the Secretary of Commerce. One of its main findings was to better measure business intangible investments, and another was to develop a fuller accounting of the sources of economic growth. Our research aims to advance these two goals by working on a large and from the standpoint of the empirical productivity literature largely under researched sector of the U.S. economy.
