R&D is not Innovation

During the 1950s and 1960s, advocates for government investments in science and technology (mainly basic research at universities) pulled off a remarkable coup. They successfully integrated conceptions of "basic research" with a linear model of innovation, making R&D a key variable in expectations for what led to national economic competitiveness.

The most recent science policy statement of the US National Academy of Sciences, ominiously titled, Rising Above the Gathering Storm (RAGS), led off with this warning (here in PDF), which illustrates such expectations:

The prosperity the United States enjoys today is due in no small part to investments the nation has made in research and development at universities, corporations, and national laboratories over the last 50 years. Recently, however, corporate, government, and national scientific and technical leaders have expressed concern that pressures on the science and technology enterprise could seriously erode this past success and jeopardize future US prosperity.

But does R&D spending correlate with economic success? Not necessarily says John Bussey in the WSJ:

Asia is spending so much on R&D that this year it will pull ahead of total spending in the Americas for the first time.

Advantage Asia?

Maybe not. In the world of R&D spending, more doesn't necessarily mean better. And R&D may not describe all the innovation that matters.

"I think the numbers are pretty useless," says Michael Schrage, a research fellow at MIT's Sloan School who has studied the subject. "What matters more is the kind of innovator you are. If it were really true that the people who spent the most on R&D were the most successful, we wouldn't be subsidizing General Motors.""There's no statistically significant relationship between how much a company spends on R&D and how they perform over time," adds Barry Jaruzelski of Booz & Co.

Why do we believe that R&D is the wellspring of economic growth? Because we have been seduced by an incorrect reading of economic theory that has distorted Schumpeterian economics and the so-called Solow residual.

Here is how the NAS RAGS report puts it:

Early in the 20th century, Joseph Schumpeter argued that innovation was the most important feature of the capitalist economy. Starting in the 1950s, Robert Solow and others developed methods of accounting for the sources of growth, leading to the observation that technologic change is responsible for over half the observed growth in labor productivity and national income.

Sure, there are caveats to this discussion presented in the RAGS report ... on p. 458. On p. 1 the report says this without such caveats:

Economic studies conducted even before the information-technology revolution have shown that as much as 85% of measured growth in US income per capita was due to technological change.

As I have noted on this blog, "technological change" is an (unfortunate) bit of economic jargon that refers to a change in the so-called production function. It does not refer to science-based technology. But in discussions of innovation policy such as that found in RAGS, "technological change" means only science-based technology, typically supported by government R&D investments.

Benoit Godin, the insightful scholar of the history of innovation, explains the consequences as follows (here in PDF):

The problem is that the academic lobby has successfully claimed a monopoly on the creation of new knowledge, and that policy-makers have been persuaded to confuse the necessary with the sufficient condition that investment in basic research would by itself necessarily lead to successful applications.

Hence, we get arguments for the importance of doubling government S&T funding in this or that area, predicated on a boost to economic competitiveness and keeping up with the Chinese/Indians/Japanese/Europeans/etc. Outside of academia, a broader set of lessons appears to be well-understood:

Booz & Co. in 2007 listed the biggest global corporate spenders of R&D. The top 10 were Toyota, Pfizer, Ford, Johnson & Johnson, DaimlerChrysler, General Motors, Microsoft, GlaxoSmithKline, Siemens and IBM.

Then it drew up a second list, a group of companies it called "high-leverage innovators" that returned the best financial performance for every dollar spent on R&D. Booz screened for companies that, over the five previous years, outperformed industry peers across seven measures—including profit, sales growth, and shareholder return—while also spending less on R&D as a percentage of sales than the median in their industries.

No company from the first list made the second list. (Winners included Adidas, Apple, Exxon, Google, Kobe Steel, Samsung and Tenneco.)

That disconnect essentially hasn't changed, says Mr. Jaruzelski. Winning at innovation "is all about talent, process, execution and strategy," he says. "That's given the U.S. a pretty strong advantage over time."

"Technology," he adds, "is not equal to innovation."

A 2011 Booz and Co. report concluded:

There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues.

Spending more on R&D won’t drive results. The most crucial factors are strategic alignment and a culture that supports innovation.

Obstacles to effective discussions of policies that foster innovation stem from the fact that much of government innovation policy is designed by academics and the S&T lobby. Within that community there is confusion about the role of "technological change" in the economy (and even what that phrase means), and more than a little conflation of self interests with what it means to grow societal wealth.