1 Comments on The R&D Production Process: Measuring R&D Kevin J. Stiroh * Federal Reserve Bank of New York December 13, 2006 *These comments are the views of the author only and do not necessarily reflect those of the Federal Reserve System or the Federal Reserve Bank of New York.

2 R&D Issues Major Comments –Is R&D fundamentally different? –Consistency and transparency Other Thoughts Outline

3 R&D Issues BLS (1989) 1)Lags 2)Depreciation 3)Deflator 4)Basic vs. applied research 5)Government vs. private finance 6)Product vs. process 7)Impact of R&D stock on productivity 8)Change in returns over time “The Impact of Research and Development on Productivity Growth”, September 1989, pg. 6. BEA (2006) 1)Scope of R&D investment 2)Assigning ownership 3)Measure of investment 4)Deflator 5)Depreciation 6)Gestation lags 7)Rates of returns “R&D Satellite Account: Preliminary Estimates,” September 2006, pg. 18.

4 Is R&D Fundamentally Different? Methodology states no –Familiar variables: I, P, , K, r, etc. –Treat R&D analogously to tangible capital with no explicit spillovers –“Just” measurement problems Language implies yes –Presumption of spillovers due to public good qualities of R&D “Measuring R&D” handout 9/29/06 BEA Press Release “R&D Satellite Account: Preliminary Estimates” Apparent disconnect with important implications –Rate of return Firm-level incentives to invest vs. GDP impact –Some claim IT has spillovers Would methodology change for tangible capital? What is burden of proof?

5 Consistency and Transparency Will internally consistent industry data be available? –Difficult, but area where biggest value/impact Particularly for question of spillovers –Data ideally presented on par with aggregates For fixed assets, BEA has disclaimer about industry/asset breakdown Will users understand the data and methodology? –More precision about exactly what was done –Example Identify “Scenario D” as implemented one only on pg. 56 “Market value” used in various ways –More equations and definitions would help

6 Other Thoughts Alternative scenarios in “R&D Satellite Account” are interesting –Highlight sensitivity and key areas for more work Two outsider’s questions: –How does this compare to what BLS does? –Can BEA sponsor new research on issues such as rates of returns, deflators, and depreciation rates?