What are the harms of using R&D expenditures as indicator of innovation?

Posted on June 27, 2016  /  1 Comments

innov_copy1Martin Fransman gave a good keynote on what causes innovation at today’s ITS conference.

One question that arose from his discussion of Apple and a low-tech (low expenditure on R&D) company was how we could objectively measure innovation. Fransman answered by saying R&D expenditures were a bad indicator, being (a) an input measure, and (b) excluding a lot of service innovation expenditures (Apple was high here). No one would be misled into believing that Apple did not innovate.

After the session I was chatting about this with Michael Latzer of U Zurich. He asked what harm there could be in using R&D expenditure even if imperfect. My answer was that there was little harm in using R&D expenditures with regard to firms. But using government R&D expenditures as indicators of innovation, where more was better was harmful. Shoveling taxpayer money at (in many cases dysfunctional) universities and research institutes with little evidence of positive outcomes could be actually harmful.

Basic research has strong positive externality effects. Thus it is difficult to fund through the market. But using this rationale as a basis for taxpayer funding is problematic. Those benefiting from such funding must be held accountable for outcomes, not inputs.

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1 Comment

  1. There are many other conditions that need to be satisfied to use R&D expenses as an indicator of innovation. The conditions include proper infrastructure such as laws & policies, guidelines to hold people accountable and strong oversight (independent institutions) on tax payer funds. In addition, strong property rights and independent judiciary are important as well. If there is no such infrastructure in place, R&D expenses as an indicator of innovation become meaningless.

    In USA, policymakers from time to time review and refine this infrastructure to minimize leakage and corruption. The 2CFR200 primarily governs federal R&D expenses (http://www.ecfr.gov/cgi-bin/text-idx?tpl=/ecfrbrowse/Title02/2cfr200_main_02.tpl) but there are many other laws (https://en.wikipedia.org/wiki/False_Claims_Act) and processes that have been established. I think this should be relevant for any other taxpayer funds as well. In my opinion, US government is reasonably successful in two ways, “establishing innovative culture” and “other targeted innovative outcomes”. This is debatable but I think justifiable correlation can be established.