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January 23, 2008

Innovation Metrics report

On Friday, the Department of Commerce released the report of the Advisory Committee on Measuring Innovation in the 21st Century Economy. The report offered a number of recommendations for government actions to improve innovation statistics. They also called on business to "create, expand and assess firm and industry-level measures of innovation and develop best practices for innovation management and accounting."

Mirroring the Committee's recommendations, the Secretary of Commerce promised action in five areas:
&bull BEA and BLS would work on an improve framework for measuring productivity in high-technology and services industries.
&bull BEA will put together a supplemental account that will track and measure intangibles - specifically intellectual property and human capital - as investments rather than expenses.
&bull BEA will work with NSF to refine measures of innovation inputs such as licensing fees and training of technology workers - going beyond current measures of R&D spending and the number of scientists and engineers.
&bull Commerce will work with other agencies and Congress to look at ways to improve the interagency sharing of information.
&bull Commerce will host at least 4 forums on innovation around the country.

Of particular interest to me was the inclusion of intangibles. The creation of a supplemental account on intangibles will have a dual impact. First, it will raise awareness of the economic importance of intangibles. It will also attack some of the issue of measurement and valuation and help set standards in these areas which should be of value in business and financial reporting as well.

I was also pleased to see the tone of the report: that we are still learning about the innovation process and that innovation itself is dynamic and not necessarily quantifiable. It also recognized that the ultimate goal is the facilitation of innovation -- not just better measurement. The report outlines a number of areas where additional research on innovation measurement is needed.

It is important to stress this last point about our lack of knowledge about the innovation process. This lack of knowledge will, I believe, become more telling as we try to answer some of the research questions. We will need to expand our models of innovation and break away from the old linear model that assumes R&D is the source of all innovation. While we are getting there - especially in the business sector, there are still remnants in our thinking.

For example, at the press conference on Friday to announce the report, references were still made equating "highly educated" and "smart" people" with "human capital." Yes, highly educated and smart people are important. But smart and highly educated are not necessarily the same thing. We also know that innovation comes from many sources - not just smart people. Ordinary front-line workers are often times a great source of innovation - as they know their jobs better than anyone else. So as we try to measure human capital, and foster its development, we need to think of mechanisms beyond those geared to “smart” people.

I am also somewhat disappointed that the Committee dismissed the idea of surveys based on OECD's Oslo Manual, which serves as the basis for the EU Community Innovation Survey and other nations’ innovation metrics. These were considered as too costly and suffering from response rate problems. The Committee is recommending number of steps that would constitute a major overhaul of the National Income and Products Accounts (NIPA) and rightfully seems to feel that the undertakings proposed is fairly ambitious undertaking without adding costs.

I somewhat understand. Our statistical system is not one that is flush with resources. In fact, it is often starved of the needed funds to make important improvements or even to carry out its basic mission. The Committee recommendations will require a commitment of resources that may be difficult to obtain. And there are cost and data issues associated with the existing Oslo Manual based surveys that could make them that much more difficult to implement.

But I still think the Oslo Manual approach should be considered in the future as they are the broadest set of direct measures of innovation available. The report does allow for this possibility, couched in the discussion of what businesses could do to collect better data and where additional research is needed.

All in all, the report is a great start to creating an innovation policy in the US. Now we need to implement its recommendations and take the next steps.

Posted by Ken Jarboe at January 23, 2008 7:23 AM

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Posted by: Bruce Barondes at January 28, 2008 1:46 PM

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