Innovation drives economic growth. But what fuels innovation? At the heart of it, research and development (R&D) activities allow scientists and researchers to develop new knowledge, techniques, and technologies. As technology changes, people can produce more with either the same amount or fewer resources, thereby increasing productivity. As productivity grows, so does the economy.
A recent study by Begun Erdil Sahin adds to the already wide breadth of economic literature that affirms this notion—investing in R&D increases economic growth. From a sample of 15 Organization for Economic Cooperation and Development (OECD) countries, including the United States, she estimates that a 1 percent increase in R&D spending could grow the economy by 0.61 percent. This means that as countries invest more in R&D, their economy will grow faster.
Significant interest in understanding how innovation impacts the economy started to gather in economics during the 1980s. Prior to this, the general consensus in economics was that innovation just “happened” and improved the economy through technological change—basically, government policy had little impact on long-term economic growth.
However, some economists started to realize that innovation could be shaped by public policy and that as
The U.S. lost more than 5 million manufacturing jobs since 2000 (roughly a 30 percent drop), while nonmanufacturing jobs have grown by 8 percent. Understanding why is critical to developing the right policy response.
Unfortunately, too many apologists for U.S. manufacturing decline argue that manufacturing employment loss is a natural trend. They blindly follow the assumption that as economies get richer they naturally consume a smaller share of manufactured goods and a larger share of services. Therefore, we should expect manufacturing job losses.
New data from the St. Louis Federal Reserve Economic Data should hopefully put an end to these false claims. Recent analysis demonstrates that after adjusting for inflation, the share of real consumption of services has actually decreased slightly after reaching a peak in 1992. At the same time, durable goods manufacturing consumption is growing as a share of total consumption.
Accounting for inflation, services reached a peak of 70 percent of total consumption in the mid-1990s and have since declined to around 66 percent. This is not so different from the late 1950s when services made up 62 percent of total consumption. Meanwhile, the consumption of durable
A month ago, I examined the academic literature surrounding what turns out to be a very tricky question for empirical researchers to answer—does digital theft of music and film have a measurable negative impact on profits for content creators? Methodologies addressing the question are fraught with complications, and while the majority of papers surveyed in a recent review of the literature (Hardy et al.) find that online piracy is not, in fact, a victimless crime, some past studies remain inconclusive. The literature is sometimes inconclusive because it is very difficult to prove that content being stolen has a negative impact on revenue in an era in which almost all digital content is stolen to some degree. However, research of late has been clearer in identifying significant causal impacts of piracy on profits and content creation in the music and film industries. As academics hone in on the question, results are beginning to coalesce around exactly the answer you would expect—online piracy has a negative impact on revenue and content creation in both music and film.
(First, I should note that as literature reviews go, Hardy et al. actually
It doesn’t take a rocket scientist to realize that online piracy is detrimental to content creators, including in the film and music industries. However, academics studying the effects appear to be behind the curve. A few studies, brandished by illegal content providers to perpetuate the myth that content theft is a ‘victimless crime,’ claim to show that illegal downloads actually contribute to industry profits.
In theory, pirates are additional viewers who could purchase merchandise or generate word-of-mouth advertising that could get others to legally view the content. If the good outweighs the bad, then piracy might actually be helping the content industry. Leaving aside the issue of morality of theft, given the scale of online piracy, it’s hard to imagine the good truly outweighing the bad. Yet there are data-driven studies by real academics insisting that digital piracy is a boon for content creators.
However, a new meta-analysis of literature examining the effects of online-piracy, Friends or Foe? A Meta-Analysis of the Link Between “Online Piracy” and Sales of Cultural Goods by Wojciech Hardy, Michal Krawczyk, and Joanna Tyrowicz, shows that these papers finding that digital piracy does not have
During the 2000s, globalization took millions of jobs from the United States. Some have been quick to associate this job loss with the technology that ostensibly made it possible, chiefly the adoption of ICT that allowed for global connectivity. So, would the United States have been better off if it had simply never invested in ICT in the first place?
There are those who would love to somehow put the technology introduced by the ICT revolution back in the box. But a new study shows that doing so would have detrimental impact on the economy. Yes, in some cases ICT investment introduced the tools which allowed companies to outsource jobs. But, as new paper, Does ICT Investment Spur or Hamper Offshoring?, finds, the same ICT investment enabled productivity gains that kept companies at home.
Of course, it is difficult empirically to determine whether ICT investments increase the likeliness of offshoring, as causality is difficult to determine. To address this problem, authors Luigi Benfratello, Tiziano Razzolini, and Alessandro Sembenelli examined small and medium-sized Italian manufacturing firms with varying access to local broadband facilities, a random variable that was used
In recent years what was once seen as crackpot economics has now become close to conventional wisdom: the notion that productivity costs jobs. Economists call this the lump of labor fallacy. As ITIF has written here, here, and here, it’s clear that the jobs problem of today has nothing to do with productivity and that we should not worry about productivity reducing the number of jobs.
But that has not stopped many talking heads and experts from opining that yes indeed, productivity kills jobs. One graph that has gotten and continues to get widespread attention is from Andrew McAfee and Erik Brynjolfsson’s book, The Second Machine Age, that shows that “productivity and employment have become decoupled.” [i]
But as any first-year statistics course will teach you, correlation does not prove causation. In fact, it is easy to get spurious correlations. Here’s one: The divorce rate in Maine is almost perfectly correlated with the per capita consumption of margarine.
In Brynjolfsson’s case, the relationship being examined merely shows two variables that happen to be increasing from 1970 to 2000, but there is no feasible underlying argument about how
Earlier this year the European Commission released a substantial report on R&D tax credits throughout the EU and several other OECD countries including the United States and Japan. R&D tax credits have been widely adopted across the developed world since the United States introduced the Research and Experimentation tax credit in 1981: only two countries in the EU do not have tax policies intended to encourage R&D.
The report is a thorough meta-study looking at the existing economics literature and available data on R&D-focused tax policy, including the impact of R&D tax policies on R&D expenditure, innovation, employment, productivity, and other factors. It also covers the literature on how corporate tax policy can affect the location of R&D and patents. Finally, the report examines the details of various tax policies and benchmarking them based on what they determine to be best practices.
The report makes a number of facts clear. First, despite a broad range of findings, “the vast majority” of studies surveyed show that R&D tax incentives are effective, with the most recent (and rigorous) studies finding that a 10% in the user cost of R&D results in a
A new report from Battelle based on methodology from the Academy of Radiology Research shows how federal R&D funding succeeds in producing patents. The report examines essentially all federal R&D, including not only the Department of Defense and the National Institutes of Health but also the Department of Energy, the National Science Foundation, NASA, and other agencies. It finds that, per patent, public-sector agencies provide a return comparable to private-sector ones—or even cheaper. Recent public sector budget cuts, therefore, can be expected to significantly hurt our scientific progress.
The agencies vary significantly in terms of how productive they are and how successful their patents are. Some agencies in particular, such as the National Institute of Biomedical Imaging and Bioengineering (NIBIB) have exceptional records for producing research that is widely useful: NIBIB is estimated to spur an additional $578.2 million, or 25 patents, for every $100 million in R&D expenditures. The DoD and NASA, on the other hand, are less efficient at producing patents at only around 2-3 patents per $100 million in R&D expenditures. (although, as the report notes, defense spending is more likely to be classified and thus not
A new SSRN paper finds that research and development (R&D) helps manufacturers keep ahead of competition from imports. U.S. manufacturing firms in industries with strong import competition from China fared better 50 percent better when they had larger stocks of capital used for R&D. While this finding is intuitive, it provides an important piece of evidence that reiterates a critical point about the U.S. economy: international competitiveness is extremely important and smart R&D policy (including tax credits) is a key method of maintaining it.
The authors Johan Hombert and Adrien Matray use granular industry-level data on imports from China and show that these imports have a significant impact on the performance of U.S. manufacturing firms. They then examine whether this impact changes depending on how much R&D capital firms have. In order to make sure the R&D capital isn’t related to other factors, they use state-level changes in R&D credit policy during the 1980s.
Their results here show that firms that had access to cheaper R&D and were thus more likely to acquire more R&D capital had an easier time “climbing the quality ladder” and staying competitive in the face
Senator and likely presidential hopeful Marco Rubio (R-FL) appeared on last Tuesday’s The Daily Show with Jon Stewart, promoting his new book and weathering an endless stream of jokes about his home state of Florida. While the discussion covered a range of policy ground, we wanted to highlight one comment by Senator Rubio that showed an all too common misunderstanding of innovation and automation.
Rubio said, “The concern I have about the minimum wage increase is that we have been told by the CBO and independent analysts that it will cost certain jobs. And that happens when some businesses will decide that well, you’ve now made our employees more expensive than machines so we’re going to automate. So in 5-10 years it’s going to happen anyway but this will accelerate this process, when you go to a fast food restaurant it will not be a person taking your order, there will be a touchscreen there that you will order from and when you get your order it will be right. [uneasy laughter] But the point is, if you make that person now more expensive than that new technology, they’re going