Comments on R&D Satellite Account:

Strengths and proposals for improvement

Bureau of Economic Analysis ConferenceMeasurement Issues and the R&D Satellite Account

MethodologyDecember 13, 2006

Carol Corrado, Federal Reserve Board

Focus of Remarks

2006/7 R&D Satellite Account

2012 NIPAs Future R&D

(R&D treated as Satellite Account Investment) (eg., RoRs, spillovers)

Conceptual issues

• Ownership and valuation issues.

• Sectoral (vs. industry) issues.

• Defining the scope of R&D investment.– Currently is NSF’s surveyed R&D. – Should other investments in new

product/process development also be included? YES! (but subject for another day)

The ownership of R&D investment

• Funder vs. Performer? Tricky….But I think BEA has this right. Implications:– Treat publicly funded R&D like a bridge or other

infrastructure. – Treat private R&D like a machine-tool or software.

• Public/ private R&D have a different “character” (basic vs. applied or up vs. down stream)– Public R&D is long-lived/valuable.– Within NIPAs => Depreciation rates for private vs

public R&D should be different (eg. via “character”).

Public knowledge stock More important than size?

Measurement of R&D investment (current dollar value)

• BEA is using cost.– The BEA document states (p23), "...there is currently

no standard measure of R&D output..." in defense of using costs.

– Measuring R&D investment as the cost of R&D is consistent with the NIPAs.

• How would you measure machine-tool investment? By the cost of the machine-tool. …. software investment, etc.

• This approach doesn't depend upon whether the firm produces the R&D itself or purchases it on the market.

• BEA has chosen no gestation lag for R&D.

Price indexes for R&D

• Economic theory suggests firms will invest in an asset up to the point that cost = PDV of the stream of income expected to be produced by the asset.

– Suggests an overall business product price is a reasonable proxy price index for private R&D.

– As the marketplace for intellectual property develops, prices of existing IP assets will be able to be recorded (and perhaps used to infer prices for “new” private R&D).

• To maintain consistency with the treatment of bridges, an input-cost approach can be used to deflate publicly R&D.

Issues needing further study

• NSF time series is affected by its exclusion of R&D by small firms (unincorporated business).– Potentially a big deal.

• Internationalization of R&D. – US R&D by foreign-owned MNCs is US investment

(and part of the US productive capital stock). – Vice versa for US MNC R&D spending abroad—

potentially large to the extent “D” locates near market.• Suggests consolidated I&P account for MNC R&D would be

of considerable interest –what impact on saving?– FOFAs and balance sheets vs. production accounts.

VC Investments as proxy…

Time-series/Quarterly estimates

• Time-series integrity of annual series– Documentation on treatment of breaks in NSF data, eg. 1994– Dispose the so-called R&D/software overlap

• NSF instructs respondents to exclude own-account software. • But, BEA may be counting software R&D as own-account software.

• Historical quarterly estimates– How well does (VC-adjusted) NSF spending relate to

employment and wages of scientists and engineers?

• Going forward: Need appropriate instrument for NIPAs– Redesign of NSF survey underway (included a lot of outreach—

great effort!)– Quarterly indicator survey (Census)? Does BEA have opinion?

Summary• Keep decisions consistent with NIPAs (or change NIPAs)

– Measure R&D investment as cost.– Use price index for business product (or product of 5-10 basic technology

groups) to deflate private R&D.– Differentiate R&D depreciation by character to highlight key distinction

between private and public R&D.

• Need to consider:– Role of venture capital (corporate/noncorporate)– Integration of BEA MNC data (domestic/r-o-w)

• Watch the IP marketplace as it develops (price data)

• Continue to work with the NSF and Census so that survey addresses the needs of the NIPAs.

• Why wait until 2012?