A Federal Effort to Measure U.S. Innovation is Timely
From the April 27th Manufacturing & Technology News
In August of 2006, Commerce Secretary Carlos Gutierrez announced that he was convening a panel of business leaders and academics to assess how best to measure innovation in the U.S. economy. This advisory group, whose first meeting was held in February, will study the impact of innovation on major sectors and will attempt to construct national and sectoral measures of innovation activity and its impact. To institutionalize this initiative, Gutierrez also announced that he is forming a Commerce Department innovation measurement team.
It is widely accepted among academic and business economists that innovative activity is essential for healthy productivity growth and global competitiveness. Recent global share and productivity data, which point to emerging productivity and competitive stresses, therefore suggest that the Commerce initiative is well timed.
National Science Foundation numbers suggest that while the U.S. lead in the share of global high-technology manufacturing output remains formidable, there has been slippage. The growth of the U.S. high-tech manufacturing share was relatively weak between 2001 (when it was 41.4 percent) and 2003 (when it was nearly 43 percent), while growth in the much smaller Chinese share was impressive, increasing from 6.3 percent to 9.3 percent in just two years.
More specifically, the National Science Foundation data raise concerns about key research and development intensive industries. For example, the U.S. share of global value-added in medical, precision and optical instrument manufacturing slipped from 39 percent in 1998 to less than 25 percent by 2003, while the European share grew from nearly 34 percent to 37.5 percent and the Chinese share grew from 1.6 percent to 3.1 percent. In pharmaceuticals, the U.S. share of global value-added slipped from 35 percent during 2001 to 32.5 percent during 2003, while the European share edged up from nearly 30 percent to 31.3 percent and the Chinese share increased from 4.5 percent to 6.1 percent.
Given the direct relationship between labor productivity and production costs as well as the central role that cost minimization plays in overall global competitiveness, recent productivity data are disconcerting. There was a significant decline between 2002 and 2006 in the annual growth of total business productivity, from 4.1 percent to 1.7 percent. Of particular note is the near halving of the annual rate of productivity growth between 2004 and 2006, even as annual GDP growth remained strong. This suggests a secular and not just cyclical productivity slowdown.
A close examination of the murkier manufacturing trend points to a potential productivity slowdown for industry, as well. Annual growth in manufacturing labor productivity slowed from 4.8 percent during 2005 to 4.0 percent in 2006 even as manufacturing production growth accelerated from 3.9 percent to 4.6 percent. Production and supply chain reforms have created healthier efficiency gains in manufacturing than the economy as a whole, but the near-term productivity future appears uncertain.
The Commerce advisory committee will confront numerous challenges as it seeks to develop national innovation metrics. In the view of this author, three are critical. The distinction between innovation input and innovation output must be considered. Further, the challenge of aggregating the innovation activities of highly diverse industries; and the need for global comparability are of importance.
The inputs that generate new and improved products and business processes are a complex mixture of labor, capital and other types of resources in combination with an investment of research time that vary greatly among industries. Because new and improved products and processes themselves are reflected in total factor productivity growth, it is measures of innovation inputs that are missing and need to be the focus of new sectoral and national measures.
Some question whether national indicators can be constructed at all given the broad diversity of industries in the modern U.S. economy. How do you aggregate the innovative activities of a steel plant and an Internet firm? If a clear and empirically translatable definition of innovation input is developed, the aggregation problem can be managed. Government economists and statisticians have been able to calculate aggregate values for employment, capital investment, profitability and other economic measures in spite of industrial diversity because they have clear working definitions of these parameters.
Creating globally comparable innovation metrics is a considerable challenge given the growing number of production and market share competitors to the United States. But global comparability is essential as emerging competitors develop their own innovative infrastructures. The members of the advisory committee will find it useful to examine the Eurozone innovation tracking system, which utilizes a fairly sophisticated Community Innovation Survey (CIS). The CIS questionnaire is designed to collect information about product and process innovation as well as organizational and marketing innovation.
In spite of the many challenges, the Commerce Department effort will clearly reap rewards. National innovation measures will allow policymakers to benchmark U.S. activities’ against key competitors in addition to providing clues as to the appropriate set of policies that are needed to maintain a competitive level of innovation input. Sector measures will allow businesses to benchmark their activities against a national average and perhaps against international averages. Well-constructed innovation metrics will be critical tools for U.S. success in the evolving global economy.
The advisory group is seeking comments from interested parties. To submit your ideas or for more information, go to www.innovationmetrics.gov.
Clifford Waldman is an economist at the Manufacturers Alliance/MAPI, and council director to the Information Systems Management Council and Manufacturing Council.
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