Innovationomics

The National Science Board released its biennial Science and Engineering Indicators report earlier this month. The press release for the report and much of the coverage of its rollout present a picture of America in decline with China and other Asian nations rapidly narrowing the U.S. lead in a variety of metrics. The implication seems to be that nations are in a zero-sum game when it comes to advances in science and technology.

Not to belittle the very real concern that the U.S. is not doing all it can to keep its science and technology engine running smoothly, the focus on report-card like metrics does not seem to do justice to the overwhelming magnitude of the report (it’s paper version clocks in 566 pages and this does not include hundreds of appendix tables). Boiling all that down to a few soundbites obviously omits many important details, caveats, and footnotes. It would be interesting to me to see more public debate and discussion about the meaning of all these statistics. At the very least the National Science Board should publish an interpretive companion piece for the 2010 Indicators as they have for past editions (maybe I just couldn’t find it on the website). Could they not reach a consensus as to what the data meant, or did they just not care?

The U.S. Bureau of Economic Analysis released its advance estimate of fourth quarter 2009 GDP this morning. The 5.7 percent increase in GDP exceeded what most economists were forecasting. In real terms, GDP in Q4 of 2009 just barely exceeded GDP in Q4 of 2008. These top-side numbers are what most people focus on, but the underlying data can provide more insight into how the economy is adjusting to the economic rollercoaster ride we’ve had over the past two years.

The data I often focus on in the GDP releases are the estimates for gross private domestic investment in equipment and software. In the grand scheme of things, these investments are only a tiny (<10%) piece of the GDP estimate, but they are highly correlated with business sector R&D spending and are likely to have spill-over effects that are note directly accounted for in BEA’s figures. According to BEA’s numbers, investment in equipment and software took a steep dive in Q4 of 2008 (-25.9% from the prior period) and Q1 of 2009 (-36.4% from the prior period). The advance estimates show an increase of 13.3% in Q4 of 2009, which indicates that businesses are once again investing in their own infrastructure. It is interesting that despite this turnaround in investments for equipment and software, that private nonresidential investment in structures continue to decline at double-digit rates.

Increases in private investment in equipment and software suggests that companies foresee increased demand for their products, but domestically and abroad. And if the investment indicates increased capacity and not simply replacement of older gear it should foreshadow employment growth as well.

After reading a post by Mike Mandel noting a decline in the share of college grads with a doctorate (and a decline in PhD’s real income over the past decade) I saw a comment from emawkc questioning whether advanced degrees really drive innovation and pointing to Bill Gates and Steve Jobs as posterchildren of under-educated innovators.

So, are Bill and Steve exceptions to the rule or are extra letters after a person’s name uncorrelated with innovation? Well… as much as it pains me to say (not having a PhD myself), when it comes to output measures of innovation (papers and patents) the PhD matters. It should be clear that this is the case in terms of academic publications, but I wasn’t sure about patents until after I did a little research of my own. I found two papers that looked at characteristics of named inventors on patents in different countries and in both cases PhDs were greatly overrepresented in the sample of inventors (that is, the percentage of inventors with PhDs was greatly larger than the share of the workforce with PhDs). Here are links to PDFs of the two papers:

Who Invents?: Evidence from the Japan-US Inventor Survey (Walsh and Nagaoka) – 45% of US inventors in their sample have a doctorate. According to the 2000 Census only 1% of persons 25 or older have a doctorate.

“Stacking” or “Picking” Patents? The Inventors’ Choice Between Quantity and Quality (Mariani and Romanelli) – 33% of inventors in their sample have a PhD. The countries in the sample were Germany, Italy, the Netherlands, and UK.

Of course correlation does not imply causation. I still do not believe that a PhD makes a person inventive–but inventive people are probably more inclined to get advanced degrees because academic research is both an outlet for creativity and a means of gathering skills needed in many fields to be both inventive and successful.

Mike Mandel, formerly at BusinessWeek, has a new blog on innovation and growth. At BusinessWeek, he reported on advances in the measurement and understanding of R&D that could have easily flown by under the radar. I look forward to reading what he has to say in the new year.

I spent this past weekend+Monday in an unseasonably cold Atlanta, Georgia attending the annual meeting of the American Economics Association. Here are my brief takeaways.

Overall theme of the meeting: “Let’s try to explain what the hell happened the past two years.”

Impressions of Fed Chairman Bernanke: Dry, clear, competent. Pins the blame for the housing bubble on lax underwriting.

Most interesting (to me) presentation: “Modeling the Innovative Process: Policy Implications”, Suzanne Scotchmer, UC-Berkeley. Prof. Scotchmer expressed a broad dissatisfaction in the current theories used to model innovation and policy mechanisms used to foster it — from using economic production functions for knowledge (which does not account for creativity or imagination) to patents and prizes (both rewards for being “first”, not necessarily “best”). She called for economists to rethink how they frame and study the role of ideas and innovation in economic growth. Unfortunately, the paper is not available online at this time.

Number of sessions devoted to Financial Institutions and Services: 29 (plus Bernanke’s talk)

Number of sessions devoted to R&D and/or innovation: 5 (the index of the meeting program lists 8 under the topic, “Technological Change – Research and Development”, but 3 of these didn’t quite match my definition)

The numbers above are a little disheartening, but I do not believe the relative dearth of research into R&D and innovation is because of general disinterest. Rather, I believe it’s because there aren’t as many rich sources of data to dig into as there are in other areas. Just as cellular biology could not grow until there was broad access to microscopes, the economics of innovation requires improved data sources to flourish. Thankfully, the session sponsored by the Kauffman Foundation, “Data Watch: New Developments in Measuring Innovation Activity”, presented several such data sources on the horizon. In particular, the greatly expanded Business R&D and Innovation Survey fielded by the Census Bureau and National Science Foundation looks like a treasure trove of information.

Best Pizza: Mellow Mushroom near the W downtown. Bonus: multiple beers on tap.

PS – I apologize for dropping the ball last year. I plan on setting aside time this year to write regularly. Let it be resolved…

Rochester Institute of Technology (RIT) recently launched a website touting its Corporate R&D program. My reaction when I first heard of the program was not favorable. For one thing, despite an 11% jump in 2007, industry funding of academic R&D accounted for only 5.4% of all academic R&D expenditures in the U.S. (Source: NSF). RIT does have more of an industrial focus than most universities, but in 2006 industry still only funded a little over 9% of RIT’s R&D. Why target a sector that is not only the smallest in terms of academic R&D funding, but one that has never in 50 years sent much more than 1 percent of its total R&D spending to universities and colleges? And even putting aside past trends, in the current economic climate few companies are planning on increasing R&D spending.

So what exactly is RIT going to do to attract research dollars from technology-based companies? First off, they have acknowledged that the relative dearth of university-industry R&D partnerships (as illustrated by the data cited above) is partly the fault of academia.  In a January 2008 speech, Bill Destler, President of RIT, cited three areas where the behavior or academia often discourage companies:

1. Unrealistic demands on the part of universities when it comes to intellectual property rights and royalty payments from corporate sponsors;
2. Academic researchers only interested in pursuing their own ideas–not those of a corporate sponsor;
3. Unwillingness of academics to work under shorter, competition-driven timeframes

RIT’s new Corporate R&D program aims to address all three areas of concern by making its faculty, students, and facilities available to companies for “short and medium term corporate research and development projects at low cost and without the usual intellectual property fights that usually derail such efforts.” Despite the recession, low cost access to the unique capabilities and intellectual capital of a research university is a value proposition that R&D managers should find very attractive–particularly without the hassle of onerous IP battles.

I applaud RIT’s efforts to lower the barriers to collaboration and I hope they are successful.

With a Secretary of Defense who is keen to cut several next-gen weapon system procurements from the DOD budget, defense contractors are going to have to shift gears and leverage their technology base in different ways if they want to maintain their future revenue flow. It looks like Lockheed Martin is preparing to do just that. The mammoth defense contractor is sponsoring a special innovation symposia at NSTI Nanotech 2009 (the largest annual nanotechnology conference and expo) with the stated aim of finding “joint R&D, licensing and partnering opportunities towards applied research, intellectual property and early-stage companies” focused on four specific technical topics.

What are these topics you ask? High-efficiency photo voltaic conversion, energy storage, smart grid modeling & monitoring, and carbon nanotube technology. Based on these choices I have a hunch the folks over at Lockheed read the stimulus package and noticed all of the cash being directed towards the Dept. of Energy. I guess the idea is that by getting green they’ll get green. Who said government spending can’t drive innovation?

Newsflash: we’re in a recession and people aren’t buying all the stuff they used to buy! So what’s a down-and-out consumer products company (which appears to be almost all of them right now) to do? Perhaps they should take a clue from fashion designers.

The Wall Street Journal’s dispatch from New York’s fashion week on Wednesday leads with the statement that, “Judging from the styles on display at fashion week, a recession does wonders for creativity.” The article goes on to provide several examples of how the fashion industry is “rethinking itself to meet the demands of consumers who want both innovative design and terrific value”. I don’t have the fashion chops to evaluate whether or not the designs on display support the WSJ’s thesis (judge for yourself), but if it is true then what’s happening in the fashion industry is what I hope to see happen in a wide range of consumer products companies.

The silver lining on the recession storm clouds is that it will make companies rethink their product development and innovation strategies. In boom times me-too product offerings and incremental improvements are relatively safe ways to keep product platforms profitable. But as consumers reign in discretionary spending, companies have to offer more than incremental improvements to entice consumers to buy their products. Despite the doom and gloom in the news, most households do still have money to spend–they just need a better reason to spend it than in the past. The companies that will weather the economic downturn are the ones that can shift their product development portfolios and devote more resources to creating the next big thing as opposed to incrementally improving the last big thing.