The Contributions of Intangible Propertyto the U.S. Economy

Matthew J. Slaughter Tuck School of Business at Dartmouth,

NBER, and CFR

White Paper sponsored by TIE CoalitionWashington, DC

June 24, 2013

Three Central Messages

• Intangible property has long played a central role in driving growth in U.S. output, jobs, and income—but fragile future.

• Globally engaged U.S. companies, which create the large majority of America’s IP, increasingly rely on their worldwide operations to maximize the creativity and benefits of their U.S. inventions.

• Because foreign-affiliate production and sales tends to complement American IP investment, raising the U.S. tax burden on IP-related income of globally engaged U.S. companies would tend to reduce the quantity and quality of IP activity in the United States.

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Message #1:

IP’s Central Role in America—But Fragile

Future?3

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IP-Intensive Industries Among the Strongest

• The bottom line of these productivity-enhancing activities has been high and rising wages: 42% premium in 2010.

Source: U.S. Commerce Department

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Is America’s Speed Limit Decelerating?

• Even before the World Financial Crisis, post-2000 economic growth in America was slowing relative to 50 earlier years. Source: U.S. BEA

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America’s Productivity Growth Has Decelerated

• Over the 20th century, over 80% of U.S. growth in output was accounted for by growth in output per worker.

Source: U.S. BLS

Slowing Productivity Growth Coincideswith Slowing Educational Attainment

• America’s dramatic educational upgrading of the 20th century largely stopped in my lifetime.– In 1969 the U.S. high-school graduation rate was 77.1%, up from

just 5% in 1900. That rate subsequently grew by about 0%.

• All while talent growth abroad accelerates (CFR).

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IP-Discovery Efforts Accelerating Abroad

• Efforts to discover IP have rapidly accelerated worldwide, such that U.S. innovativeness ranking widely seen as falling.

Source: NSF

Voices Have Been Warning This for Many Years

“The educational foundations of our society are presently being eroded by a rising tide of mediocrity that threatens our very future as a Nation and a people … If an unfriendly foreign power had attempted to impose on America the mediocre educational performance that exists today, we might well have viewed it as an act of war.”

A Nation at Risk, commissioned by President Reagan, 1983

Message #2:

Globally Engaged Companies Make Most IP—and Aspire to Connect It

to World

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Central U.S. Role of Multinational Companies

• Bottom line of these innovative activities of U.S. global companies is millions of good jobs at high wages.

Source: U.S. BEA

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Where These Companies See Growth is Abroad

• U.S. share of global GDP has fallen from 32.3% in 2001 to just 21.6% in 2011.

Source: U.S. BEA

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Meeting Demand Growth via Affiliate Sales

• Over 90% of these affiliate sales in recent years are abroad, not imports returning to United States.

Source: U.S. BEA

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IP-Intensive Industries Are More Global

• In United States, share of output accounted for by U.S. multinational parents is higher in IP-intensive industries.

Source: U.S. BEA

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IP-Intensive Industries Are More Global

• Worldwide, share of output accounted for by foreign affiliates is higher in IP-intensive industries than for all industries. Source: U.S. BEA

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Foreign Expansion Complements U.S. Activity

• A 10% increase in foreign-affiliate sales boosts U.S.-parent R&D investment by about 3.2%-5.0%.

Source: U.S. BEA

Message #3:

Tax Policy Should Support, Not Stifle,

U.S. IP Activity

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U.S. Innovation Is Impeded by Poor Policies

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Conclusions

• Intangible property has long played a central role in driving growth in U.S. output, jobs, and income—but fragile future.

• Globally engaged U.S. companies, which create the large majority of America’s IP, increasingly rely on their worldwide operations to maximize the creativity and benefits of their U.S. inventions.

• Because foreign-affiliate production and sales tends to complement American IP investment, raising the U.S. tax burden on IP-related income of globally engaged U.S. companies would tend to reduce the quantity and quality of IP activity in the United States.

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