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Why Investing in R&D Matters

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What do the electric light bulb, the internal combustion engine and the transistor have in common? They are all examples of how innovative ideas can bring rapid change and growth to our economy. Innovation has long been recognized as an important driver of economic growth.  New ideas can spark wave upon wave of new goods and services that literally transform the economy, making it more robust and vibrant.

What exactly is innovation? A precise explanation can be elusive, but common to every definition is the idea of realizing commercial value by creating something that did not previously exist. And, while economists agree that innovation is important for economic growth, actually measuring it is quite a challenge. Innovation is what’s known as an intangible asset. It’s hard to quantify. Understanding the role of intangible assets–and thus the role of innovative activity in general–is critical to understanding the modern economy.That’s why the Department of Commerce’s Bureau of Economic Analysis (BEA) has been at the forefront of efforts to expand its statistics on gross domestic product to include the effects of more intangible assets, which represent an important input into the innovative process. For example, in 1999 BEA changed the treatment of spending on computer software in order to account for it as an investment rather than an expense in calculating GDP. In 2006, the agency launched an exploratory effort (PDF) to better capture the effects of R&D spending on the overall economy.

The latest data (PDF) show that if R&D spending was treated as an investment, rather than a current expense, the level of GDP would have been, on average, 2.7 percent, or $301.5 billion, higher than reported over the period 1998 and 2007. It’s estimated that business investment in R&D had a significant contribution to economic growth over the same period, accounting for about a 4 percent share of the growth in real GDP, on average. To compare the intangible business R&D asset to something you see every day, business investment in office buildings and other types of nonresidential structures accounted for about 1 percent of real GDP growth.  R&D investment, which contributes to economic growth, can also positively affect living standards. Capturing R&D as investment would help to better reflect this; if R&D was treated as investment, GDP per capita would increase by an average of about $1,000 over the period.  Further, outside research suggests that the “spillover effects” of R&D spending–that is residual unexplainable portions of growth–are at least as large as the direct returns, indicating that R&D spending may account for as much as one-sixth of total factor productivity growth.

Which industries are currently putting the most into research and development? According to the BEA (PDF), biotechnology, and information, communication and technology (ICT) industries accounted for four-fifths of the business sector’s R&D contribution to GDP growth between 1998 and 2007. Transportation equipment industries contributed about 11 percent.

Next year, the BEA intends to incorporate R&D investment into the core GDP measures. It will mark one more achievement in the never-ending effort to better understand our constantly evolving economy.

Learn more about BEA’s Research and Development Satellite Account

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