On January 24, I participated in a panel on The Impact of R&D on US Economic Competitiveness sponsored by the Senate Sciences and Technology Caucus. The bipartisan Senate S&T Caucus was created to better inform members of congress and their staffs about the importance of science and technology issues, and in particular, about the relationship between science and technology and continued American competitiveness in an increasingly global marketplace. It is co-chaired by senators Jeff Bingaman and Lamar Alexander.
The panel was moderated by Steve Merrill who is Executive Director of the National Academies' Board on Science, Technology and Economic Policy. The panel included Sumiye Okubo, who is Associate Director for Industry Accounts at the Bureau of Economic Analysis of the Department of Commerce; Dale Jorgenson, Professor of Economics at Harvard University; and me.
My remarks focused on the emerging opportunities in marketplace innovation. Most statistics used to measure R&D focus on classic or laboratory-based innovation. However, the nature of R&D is evolving and today more and more R&D and innovation take place outside the laboratory, in particular in those activities that are market-facing and involve people, either as providers or consumers of services. The reason is that innovation increasingly is occurring not just in the technologies and products themselves - which are developed in laboratories, - but in their application to problems in the marketplace and society at large, in industry after industry, from healthcare to finance to distribution to government. The opportunities for such marketplace innovation are clearly very large, and they are heavily dependent on innovation in services.
Given the fact that services account for more than 75% of the US economy while employing a similar percentage of the US labor force, it is imperative that we focus our measurements, and most important, our actions on this all important segment if we hope to increase overall US growth and productivity.
Innovation in services has lagged behind because, until recently, the technologies were just not there for us to be able to make much progress. But, in the last few years the picture has changed significantly, as advances in IT, industry standards, and especially the Internet have finally enabled us to start improving the productivity of services. This is all in the very early stages, so to make the needed progress we must invest in services R&D, in innovative industry solutions and in new business models. We also need to significantly revamp our educational programs to better prepare students with the skills necessary for 21st century jobs that will almost certainly be dominated by services and related disciplines.
Professor Dale Jorgenson gave an excellent talk on Productivity Growth in the New Millennium and its Industry Origins. This is a subject on which he has written extensively, such as in the recently published book, Information Technology and the American Growth Resurgence and the related article, The Industry Origins of the American Productivity Resurgence.
In his presentation at the Senate S&T Caucus and in his writings Professor Jorgenson has been analyzing America's growth resurgence and its relationship to IT prices and investments. He concludes that the relentless decline in the prices of IT equipment and software as well as improvements in organizational effectiveness - a result of the increased competitiveness in our economy - have resulted in a significant growth in US productivity over the past decade. Consequently, a consensus has emerged holding that the remarkable improvements in IT provide the key to the increase in US economic growth after 1995.
Professor Jorgenson then segments industries into three main categories for further analysis. IT-Producing industries - which include computers and office equipment, communications equipment, computer services and electronics components; IT-Using industries, which are those that use IT more extensively and which he defines as a 15% or greater IT capital share in 1995. In the last category are Non-IT industries, defined as those with a lesser use of IT.
Based on his analysis, IT-Producing industries have been responsible for a significant share of the productivity growth since 1995, not a surprising result given the huge advances in the price and performance of information technologies in the last twelve years. He demonstrates that the IT-Producing industry’s growth results from both the dramatic declines in semiconductor prices, as well as the improvements in organizational effectiveness in response to the fierce competition in the IT industry.
He also shows that those industries that use IT more intensively - the IT-Using industries - have experienced significantly faster productivity growth than the Non-IT using industries. It would appear that IT does indeed matter.
But, the analysis that I found most compelling in his presentation is that since 2000, while the productivity growth of the IT-Producing industries has slowed quite a bit after the bursting of the dot com bubble, the productivity growth of the IT-Using industries has significantly increased. I would like to think that this is evidence that the value of IT is now shifting from the technology itself to the applications of technology in the marketplace. Therefore, you would expect that those businesses that are best at leveraging IT, - the IT-Using industries, - are now exhibiting the largest increases in productivity growth.
Professor Jorgenson believes that the prospects for US economic growth into the future remain bright. The four IT-Producing industries that accounted for such a large percentage of productivity improvements prior to 2000 constitute only 3% of the GDP. The fact that the IT-Using industries, which account for a much larger 25% of the GDP are now showing healthy productivity growth is a very good sign. Furthermore, one would expect that the remaining Non-IT industries accounting for 70% of the GDP, will follow the example of the IT-Using industries. The Non-IT industries will hopefully increase their use of technology and engineering know-how to improve their processes, as well as apply systems expertise to better integrate their processes, information and people. These actions should translate into productivity improvements over time.
The IT industry may perhaps be entering what Venezuelan scholar Carlota Perez has called the deployment period of a technology revolution, where the underlying technologies that caused the revolution in the first place in what she calls the installation period, are now mature, well entrenched and ubiquitous in all aspects of business and society, and their impact is now transforming the overall economy and just about every one of its institutions.
I finished my remarks to the Senate S&T Caucus by observing that:
"Innovation is occurring in the marketplace everyday, but I must emphasize that this innovation is not unique to the US. It is happening all over the world. Everyday, IBM is challenged to become more innovative in order to provide better products and services to our customers – and to succeed against global competitors who have exactly the same objective.
Let me conclude by saying simply that we, as a nation, need to continue working to find ways to spur innovation and US competitiveness if we are to create new opportunities for US companies and for their employees. We must take actions now and invest in our future – our economic growth and success depend on it."
Irving
Many thanks for the thoughtful and important article. I actually think the application of technologies in the workplace across numerous industries is something that from an economic policy perspective is highly important but lacking in the tools necessary for a proper understanding. One of the major challenges today and going forward is the ability to accurately "measure" the applications of new or old technologies in the marketplace as companies innovate on site.
Many of the statistical methodologies used by various governmental agencies were developed decades ago and as such are unable to fully capture the underlying trends and changes you describe. Hence, the debate about U.S. productivity and how much is real versus imagined. From a policy perspective the risk is that we have a limited view of what is actually happening in the economy, which can then lead to less-than-informed policy debates and solutions.
I actually think the whole area of economic measurement at the macro- and micro-level is ripe for the application of new technologies so that government agencies and policymakers have an enhanced understanding.
Kind regards
Henry Engler
Posted by: Henry Engler | February 05, 2007 at 11:32 AM