In ongoing research, Professors Andrew Atkeson and Ariel Burstein study the role of firms’ investments in innovation (or, more generally, intangible capital) in accounting for economic growth. They ask questions such as: What changes should we expect to see in the growth rate of output in both the short term and long term if we were to increase innovation subsidies to induce firms to invest more in innovation? How big a change in firms’ expenditures on innovation would be required to raise the growth rate of output by a percentage point (or two or three) over the next 20 years? And what would be the fiscal cost of the policies needed to induce firms to make the required increased investments in innovation?

Their research is aimed at overcoming several theoretical and empirical challenges that make it difficult to give precise answers to these questions.

First, until recently, no comprehensive historical data had been available on the scale of firms’ expenditures on innovation. Starting in 2013, however, the Bureau of Economic Analysis (within the US Department of Commerce) has constructed measures of firms’ investments in software, intellectual property products, and research and development going back to 1929.  Researchers within the main statistical agencies are also starting to construct measures of firms’ investments in other forms of intangible capital such as firms’ brands and organizational capabilities. The picture painted by these recent data collection efforts is that firms’ investments in intangible capital are large. In the United States, they are now roughly as large as firms’ investments in physical or tangible capital.

Second, neither theory nor data have settled the question of what relationship exists between the private gains to an individual firm (in terms of increased profits and firm value) from increased investment in innovation and the gains to society as a whole (in terms of increased output and welfare) from an increase in firms’ aggregate investments in innovation. The private gains to an individual firm from an investment in innovation can typically be measured and are certainly the focus of attention of firm managers making the innovation decisions. The social gains from an increase in firms’ investments in innovation in the aggregate, however, are harder to measure. We do not have the data needed to answer the questions: To what extent does an innovation by one firm simply steal business from another? To what extent does the knowledge gained in one firm through innovation spill over to reduce the cost of innovation by other firms?

The work by Atkeson and Burstein, titled “Aggregate Implications of Innovation Policy” is focused on using newly developed theories of the relationship between the private and social gains from firms’ innovation expenditures together with newly collected data on the scale of firms’ investments in innovation to measure what scope we might have to increase economic growth through increased subsidies to innovative investments by firms.  They find that the scope to improve economic growth through general subsidies to firms’ innovative investments by firms is likely quite limited given current estimates of the extent to which innovation by new firms simply steals business from existing firm (think of the impact of Uber on the taxi business). In contrast, if it were possible to direct subsidies to incumbent firms focused on improving their own products, then the gains in terms of economic growth from such directed subsidies might be quite large.