Measuring Innovation

A long-awaited report on how to measure innovation in the U.S. economy has just been released by the U.S. Commerce Department. The report is called “Innovation Measurement: Tracking the State of Innovation in the 21st Century Economy”. I first learned about this high-profile initiative last October; a press release revealed that a panel of CEOs and academics had met in Washington DC to discuss how to measure innovation in the U.S. economy. When I say “high profile” I mean folks like Microsoft CEO Steve Ballmer, Medtronic Chairman and CEO Art Collins, IBM CEO Samual Palmisano, and Harvard economist Dale Jorgenson.  The original press release said that the panel’s recommendations would be published in November; perhaps only an innovation junkie like me would be checking every week since then!

To measure the impact of innovation on the economy, analysts often use a measure called Total Factor Productivity (TFP). Any growth in TFP is assumed to result from innovation. Of course, the problem is that productivity could grow for other, non-innovation, reasons (for example, if existing innovations are diffused more broadly, TFP would grow even without new innovations). Other common measures of a country’s innovation have their own problems. You could count up the number of patents; but, patents alone don’t translate into successful innovation. You could count up the number of professionals working in R&D and university research labs; but as with patents, that’s a crude measure that doesn’t directly track successful innovation.

In the end, the panel’s report doesn’t tell us exactly what to do.  Panel member Ashis Arora, Professor of Economics and Public Policy at Carnegie Mellon, said that “The current advisory panel did not opt to recommend an index, because there is no serious evidence on how different measures of innovation should be combined, either at the organizational level or at the aggregate national level.”  However, Commerce Secretary Gutierrez outlined a plan for moving forward: a better measure of the impact of high-tech goods and services (to be developed by the Bureau of Economic Analysis and the Bureau of Labor Statistics); a better way to measure productivity increases that result from innovation investment (to be developed by the BEA); and new data collection efforts to measure the role of basic research (spearheaded by the National Science Foundation).

A longstanding problem has been getting different government agencies to share data with each other.  The stumbling block has always been confidentiality concerns.  Secretary Gutierrez announced his intention to work aggressively with the relevant agencies to try to find a way to share the relevant data while addressing confidentiality concerns.  That’s going to require working with a wide range of agencies including the Office of Management and Budget, the Council of Economic Advisors, the Census Bureau, and the Securities and Exchange Commission.  That’s a pretty tall order, but if that could happen it would result in a much better picture of national innovation.

Quote of the week:

“I don’t think people appreciate how much money, time and good technical research goes into what we do. Sometimes, people think the idea is the thing. I think the idea can be the easy part.” Dr. Darryle Schoepp, of Eli Lilly, in an interview about new drug development quoted in the New York Times (Sunday, February 24, 2008, Business section p. 10).

2 thoughts on “Measuring Innovation

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