In a new study published by the National Bureau of Economic Research, three economists study the effect of a recent change in Canada’s research and development (R&D) tax credit on subsequent spending by small companies. The question is especially interesting because small firms may lack sophisticated tax advisors, earn few profits and thus have a lower tax liability against which to deduct tax credits, and have a harder time financing the fixed costs that come with additional research.
In “Do Tax Credits Affect R&D Expenditures for Small Firms? Evidence from Canada,” the authors find that firms that qualified for a larger tax credit did spend more on R&D in the following years compared to firms of similar income whose tax situation did not change. They also find evidence that the refundable nature of the credit made a significant difference.
According to the paper, Canadian tax law allows all countries to deduct 100 percent of research performed in Canada from their taxable income. It also provides all firms with a non-refundable tax credit of 20 percent of qualifying expenditures. However, for small- and medium-size companies (determined by the previous … Read the rest
In the 1980s, Japan was America’s chief rival in most technology industries. Not only could Japanese firms compete in advanced sectors against U.S. firms, they had an innovation advantage. In fact, research and design (R&D) investments in Japan were 40 percent more productive in producing IT patents than were R&D investments in the United States, implying that Japanese firms were better able to make advancements into developing better good, products, and processes.
However, in the 1990s this trend reversed. U.S. firms, while less innovative in hardware manufacturing, developed an innovation advantage in software, with R&D spending yielding 60 percent more patents per dollar spent in the United States than in Japan. A recent paper by Ashish Arora, Lee G. Branstette, and Matej Drev explains why.
Software represented a new frontier for an industry that had previously focused on producing hardware such as semiconductor, televisions, computers, and other advanced machinery. High-tech firms adjusted rapidly to the new challenge, and innovations quickly built on previous innovations, and an IT patent filed in 2002 was 10 times more likely to cite a software patent than one filed in 1992.
Advanced technology industries in … Read the rest
Proponents of effective intellectual property (IP) rights have long argued that weak IP protections will lead to less intellectual property creation. The logic appears clear: if content creators and other innovators know that a significant share of their work will be pirated or otherwise stolen they will have both less incentive and less revenue to create new ideas, creative goods, and innovations.
But how strong is this effect? To find out, we compared IP protection data from the World Economic Forum’s 2014-2015 Global Competitiveness Report, which incorporates the strength of IP laws and the stringency and effectiveness of anti-counterfeiting laws, and creative outputs scores from the 2014 Global Innovation Index, a report from Cornell, Insead and WIPO.
Put simply, countries that score higher on IP protection also score higher on creative outputs relative to the size of their economy. Over a sample of 136 countries there is a strong positive correlation of 0.72 between the strength of IP protections and score on creative outputs.
The Global Innovation Index has three distinct measures of creativity in an economy. First, “intangible assets” combines measures of domestic and international trademark applications … Read the rest
Many recent studies have shown that America is no longer winning the global innovation race, as demonstrated by manufacturing-sector decline, lacking public policy measures, poor advanced-sector job growth, faltering support of R&D, and overall low international rankings. The latest indication of America’s slipping innovation potential is triadic patents. Since 1999, the U.S. has experienced a sharp decline, with 13 percent fewer triadic patents, a product of America’s lethargic approach to fueling innovation.
Triadic patents are patents filed jointly with the United States Patent and Trade Office, the European Patent Office, and the Japanese Patent Office to guarantee intellectual property (IP) protection worldwide. Because they represent inventions with global impact, triadic patent numbers are in many cases a better indicator of invention and innovation than regular patents.
From 1999 to 2011, U.S. triadic patent filings decreased from 32 percent to 29 percent of global triadic patents. When controlling for increases to the U.S. working age population over this time period, the United States produces a full 25 percent fewer triadic patents per person than it did in 1999. This troubling statistic sharply contrasts with the United … Read the rest
A recent NBER working paper offers up some interesting new survey data on innovation in U.S. manufacturing industries. Authors Ashish Arora, Wesley M. Cohen, and John P. Walsh surveyed more than 5000 U.S. manufacturing firms in 2010, asking whether or not they brought new products to market in the previous three years.
Most notably, the data shows that the number of truly innovative manufacturing firms is relatively small. In the aggregate, it finds that 43 percent of firms introduced new products in the past three years, but only 18 percent of firms introduced new products that were wholly new to their market. In other words, one quarter of firms, and more than half of firms introducing new products, introduced “imitation” products following the lead of other companies. The percent of firms introducing totally new products ranged significantly between industries, from just 10 percent of firms in the “Wood” and the “Metals” industries, to 44 percent in the “Instruments” industry.
The survey also breaks down the results in a number of interesting ways, including where the innovations originated. It finds that the most common source of innovation is customers. This is … Read the rest
Productivity is one of the most fundamental determinants of our income and overall wellbeing, so the question of where productivity growth comes from is extremely important. There are many different ways to increase productivity, but increases that have a continued impact over time are the most important because accumulated productivity increases end up having a much larger impact than one-off changes.
Economists have understood for years that R&D is an important source of productivity growth. However, it hasn’t been entirely clear whether R&D affects productivity growth in short, one-time boosts, or whether it raises growth rates for longer periods.
A new paper by Italian economists Antonio Minniti and Francesco Venturini looks at data from the U.S. manufacturing sector and concludes that R&D policies have indeed created “persistent, if not permanent” changes in the rate of productivity growth. It also drills down into the type of R&D spending, finding that only R&D tax credits have a long-term impact on the growth rate while R&D subsidies provide just a temporary boost.
These results are good news for both the economy and for policymakers because they show the powerful impact that innovation policies … Read the rest
For much of the postwar era the United States led the world in technology, which brought significant economic benefits to the nation. That leadership was due in large part to generous federal government funding for R&D, much of it channeled through military spending. That this occurred during the Cold War was no coincidence: as William Janeway argues in Doing Capitalism in the Innovation Economy, nations have historically been unable to muster the political will for significant spending on innovation without it being part of a “national mission,” since such spending means giving up current consumption for uncertain future benefits. In the last half of the 1800s, nation building provided the mission for America—just as that does now for China. But after the late 1940s the animating mission that helped drive technology innovation was winning the Cold War, which we did.
The threat from the Soviet Union meant that Americans were willing to sacrifice present consumption for the good of the nation–in this case keeping the world safe for freedom and democracy. And it meant we did what it took to win—and that meant innovating. The fact that Lockheed’s Skunk … Read the rest
In an otherwise quite nice report from the Government Accounting Office (GAO) called Global Manufacturing: Foreign Government Programs Differ in Some Key Respects from those in the United States, the authors discuss the efforts of countries including Canada, Germany, Japan, South Korea, and the United States to support manufacturing, in part through the development of regional high-tech clusters. Yet the report’s authors argue that “the effectiveness of cluster policy has not been established; the formation of successful clusters in the United States, such as California’s Silicon Valley, suggests that government support for clusters may not be necessary.”
Unfortunately, here the GAO authors are echoing the point of view of individuals such as Michael Arrington, who believes that the Best Way to Fix Silicon Valley is to Leave it Alone. But as Robert Atkinson convincingly argues in Divorce Washington at Your Peril, Silicon Valley—as will a forthcoming MIT-ITIF report, Federally Supported Innovations: 22 Examples of Major Technology Advances that Stem from Federal Research Support (February 2014)—government support has actually played a fundamental underlying role in the development of Silicon Valley (as it has in the development of other … Read the rest
Economist, venture capitalist, and co-founder of the Institute for New Economic Thinking Dr. William Janeway stopped by ITIF this week for a discussion about his new book, Doing Capitalism in an Innovation Economy. Dr. Janeway presented a compelling view of the economy and touched on a number of important issues along the way.
Janeway explained that the government plays a critical role in innovation by providing research funding through institutions such as DARPA and the NIH, by leveraging the buying power of the federal coffers, and by creating policies that encourage business investment in R&D. Economists have long understood that private markets fail to allocate adequate resources to innovation and research: the benefits are too hard for individual corporations to capture. For this reason, policies like the R&D tax credit and public investment in basic research have long been uncontroversial.
Contrary to what recent high-profile failures like Solyndra might lead people to believe, government policies to spur innovation in the United States have had great success. This is apparent in the vast amount of money the private sector has poured into IT and Biotech businesses based on initial … Read the rest
R&D is fundamentally important to economies because it is a primary source for innovation and new technologies. But markets rarely provide enough incentives for innovation on their own—innovations are expensive to create but easy to copy.
For those reasons many countries provide R&D tax incentives to companies that spend money on basic or applied research. The best way to think of this policy is as actually as a fix—R&D has positive benefits for the economy as a whole, but because individual companies have trouble capturing all the benefits of R&D they are unlikely to invest the socially optimal amount.
Tax breaks for businesses are fraught with controversy because they “distort” the market and according to conventional neoclassical economics thinking distortions are by definition bad, even if they are pro-growth. To be sure certain tax incentives outlive their usefulness, as they have in the fossil fuel industry, and some tax incentives are only on the books because they serve special interests, not the public interest.