What Drives R and D Productivity?

Summary of working paper 7876
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A country's level of national innovative capacity also has a substantial impact on commercial success in high-tech markets at home and abroad.

In recent years, both economists and policymakers have focused increased attention on the role that R and D plays in promoting economic growth. Despite the fact that R and D activities exist in many countries, only a handful of nations consistently create leading edge technologies, from communication advances to biomedical revolutions. American scientists, engineers, and other highly skilled professionals are tops in generating "new-to-the-world" technologies; only Switzerland had a per capita patenting rate comparable to the United States in the 1970s and 1980s. However, Japan, Germany, and Sweden did join the top tier in the 1980s.

Why do some nations excel at technological breakthroughs while others lag behind? Put somewhat differently, why does location matter for innovation when ideas easily cross borders, because of global communications networks, relatively open capital markets, and consistently increasing international trade in goods and services? The answers are more than intellectually intriguing. Governments and policymakers are concerned about which resources and policies are likely to be effective in improving their science and technology infrastructures. A better grasp of the complex links between broad public policies and a nation's ability to produce genuine high-tech innovations could lead to more effective strategies for improving economic growth.

These are the ambitious issues motivating The Determinants of National Innovative Capacity (NBER Working Paper No. 7876) by Scott Stern, Michael Porter, and Jeffrey Furman, which evaluates the factors driving variation in R and D productivity among a sample of 17 OECD countries between 1973 and 1996. The key concept framing their analysis is "national innovative capacity," defined by the authors as "the ability of a country -- as both a political and economic entity -- to produce and commercialize a flow of innovative technology over the long-term."

The national innovative capacity concept is built on three distinct scholarly strands. First are the theories of ideas-driven growth, closely associated with the work of Paul Romer. Then there are the microeconomic models of national competitive advantage based on an understanding of industry clusters, a research agenda largely identified with Porter. Finally, the authors draw upon the rich national innovation systems literature among whose most notable authors is Richard Nelson. The national innovative capacity framework highlights three factors that drive a nation's ability to innovate at the world's technological frontier: 1) a common innovation infrastructure, which includes support for basic research and higher education, as well as a country's cumulative stock of technological knowledge; 2) the extent to which the conditions of a nation's industry clusters promote innovation-based competition; and, 3) linkages between the common innovation infrastructure and the industry clusters that allow the resources broadly available for innovation in the economy to flow to their most competitive use. "The productivity of a strong national innovation infrastructure is higher when specific mechanisms or institutions, such as a strong domestic university system and funding mechanisms for new ventures, migrate ideas from the common infrastructure into commercial practice," write the authors.

Porter, Stern, and Furman's quantitative analysis concentrates on uncovering the relationship between international patenting (patenting by foreign countries in the United States) and the variables making up the innovative capacity framework. Their results suggest that a number of factors are especially important in determining a nation's overall level of innovative outputs, including national policies, such as international patent protection and openness to international trade, and factors describing the composition of R and D effort in the economy, such as the share of research performed by the academic sector and the share funded by the private sector. In expanding their analysis to examine the relationship between innovativeness and competitiveness, the authors find that a country's level of national innovative capacity also has a substantial impact on commercial success in high-tech markets at home and abroad.

The authors document a striking convergence in innovative capacity among the OECD countries over the past two decades. Whereas the United States and Switzerland had been the world leaders with respect to R and D productivity in the mid-1970s, Japan, Germany, and Sweden have become their peers in the innovation marketplace. The second tier of innovator nations also has expanded with Denmark, Finland, and other countries making genuine strides in improving their commercial exploitation of frontier technologies. The trend toward convergence also may reflect a lessening of America's traditional dominance. Since the passing of the Cold War, the United States has been increasing its investments in its national innovation infrastructure at a lower rate. Consequently, the authors speculate, as a wider set of countries continue to invest substantial resources in national innovative capacity, we may see that the commercial development of emerging technologies becomes less geographically concentrated in the next few decades than it was in the 50 years of the post-World War II era.

-- Christopher Farrell