# Presentation: 272499

## Comments on R&D Satellite Account: Strengths and proposals for improvement

**Bureau of Economic Analysis Conference**
**Measurement Issues and the R&D Satellite Account Methodology**
**December 13, 2006**
- Carol Corrado, Federal Reserve Board

## Focus of Remarks

- 		    2006/7 R&D Satellite Account
- 2012 NIPAs			    Future R&D
- (R&D treated as			Satellite Account
-    Investment)			(eg., RoRs, spillovers)

## Conceptual issues

- Ownership and valuation issues.
- Sectoral (vs. industry) issues.
- Defining the scope of R&D investment.
- Currently is NSF’s surveyed R&D.
- Should other investments in new product/process development also be included?  *YES! (but subject for another day)*

## The ownership of R&D investment 

- Funder vs. Performer?   Tricky....But I think BEA has this right.  Implications:
- Treat publicly funded R&D like a bridge or other infrastructure.
- Treat private R&D like a machine-tool or software.
- Public/ private R&D have a different “character” (basic vs. applied or up vs. down stream)
- Public R&D is long-lived/valuable.
- Within NIPAs => Depreciation rates for private vs public R&D should be different (eg.  via “character”).

## Public knowledge stock More important than size?

## Measurement of R&D investment (current dollar value)

- BEA is using cost.
- The BEA document states (p23), "...there is currently no standard measure of R&D output..."  in defense of using costs.
- Measuring R&D investment as the cost of R&D is consistent with the NIPAs.
- How would you measure machine-tool investment?  By the cost of the machine-tool.    .... software investment, etc.
- This approach doesn't depend upon whether the firm produces the R&D itself or purchases it on the market.
- BEA has chosen no gestation lag for R&D.

## Price indexes for R&D

- Economic theory suggests firms will invest in an asset up to the point that cost = PDV of the stream of income expected to be produced by the asset.
- Suggests an overall business product price is a reasonable proxy price index for private R&D.
- As the marketplace for intellectual property develops, prices of existing IP assets will be able to be recorded (and perhaps used to infer prices for “new” private R&D).
- To maintain consistency with the treatment of bridges, an input-cost approach can be used to deflate publicly R&D.

**Notes:**
(I don’t view PDV as alternative for valuing new investment.
Rather, ET/PDV approach suggests an overall business product price is a good proxy price index for private R&D.

## Issues needing further study

- NSF time series is affected by its exclusion of R&D by small firms (unincorporated business).
***Potentially a big deal.***
- Internationalization of R&D.
- US R&D by foreign-owned MNCs is US investment (and part of the US productive capital stock).
- Vice versa for US MNC R&D spending abroad—potentially large to the extent “D” locates near market.
- Suggests consolidated I&P account for MNC R&D would be of considerable interest –what impact on saving?
- FOFAs and balance sheets vs. production accounts.

## VC Investments as proxy... 

## Time-series/Quarterly estimates

- Time-series integrity of annual series
- Documentation on treatment of breaks in NSF data, eg. 1994
- Dispose the so-called R&D/software overlap
- NSF instructs respondents to exclude own-account software.
- But, BEA may be counting software R&D as own-account software.
- Historical quarterly estimates
- How well does (VC-adjusted) NSF spending relate to employment and wages of scientists and engineers?
- Going forward: Need appropriate instrument for NIPAs
- Redesign of NSF survey underway (included a lot of outreach—great effort!)
- Quarterly indicator survey (Census)?  Does BEA have opinion?

## Summary

- Keep decisions consistent with NIPAs (or change NIPAs)
- Measure R&D investment as cost.
- Use price index for business product (or product of 5-10 basic technology groups) to deflate private R&D.
- Differentiate R&D depreciation by character to highlight key distinction between private and public R&D.
- Need to consider:
- Role of venture capital (corporate/noncorporate)
- Integration of BEA MNC data (domestic/r-o-w)
- Watch the IP marketplace as it develops (price data)
- Continue to work with the NSF and Census so that survey addresses the needs of the NIPAs.
***Why wait until 2012?***