SCIENCE & ENGINEERING INDICATORS

Inventions and knowledge transfer provide the raw material for new and improved commercially viable products and processes. Despite frequent usage of the term itself, innovation is hard to measure. Business innovation is defined as the implementation of a new or improved product or business process that differs significantly from previous products or processes and that has been introduced in the market or brought into use by the firm (OECD/Eurostat 2018).

This section discusses complementary innovation-related indicators that provide information on different aspects of innovation. For example, innovation indicators aim to measure the way inputs create new value in the economy. Examples of such indicators include business investment in intangibles, such as software, R&D, and artistic creations; private funding of innovation; and firm-reported data on the introduction of new and improved products and processes. Innovation also produces broader economic impacts, such as improved living standards, productivity growth, and the creation of new firms and new jobs. Broader societal impacts also include improved health outcomes and life expectancy (Cutler and McClellan 2001; Deaton 2013).

Intellectual property resulting from knowledge and creative activity includes literary and artistic works as well as symbols, images, and names used in commerce (WIPO 2019). The assets underlying these protections are often intangible assets. Some intangibles create benefits for years to come; examples include, but are not limited to, computer software, R&D activity, and designs and artistic creations. Digitization allows the simultaneous use of many types of intangibles in more than one location, adding a dimension of use that tangibles, such as machine tools and buildings, do not possess. Transmitting these intangibles digitally across networks multiplies potential impact. U.S. investment in computer software and R&D have risen rapidly in the last two decades.

Between 2007 and 2017, U.S. businesses increased their annual investment in these three intangible assets, computer software, R&D, and artistic originals, by almost 50% to $796 billion. By broad sector, manufacturing and nonmanufacturing, this intangible investment was $267 and $528 billion (inflation adjusted), respectively (Figure 8-20 and Figure 8-21).^{​These are measured by the Bureau of Economic Analysis (Soloveichik and Wasshausen 2013) and tabulated by the Bureau of Labor Statistics as part of its measurement of productivity.} Patents, copyrights, and trade secrets are different forms of intellectual property protection that secure intangible asset owners with the rights of exclusive use.

As a share of total investment in intangibles, manufacturing invested more in R&D than nonmanufacturing, and nonmanufacturing invested more in software relative to the manufacturing sector (Figure 8-20 and Figure 8-21). In addition, there was $80 billion in investment in artistic originals in 2017, all outside of manufacturing (Figure 8-21). Digitization and networking have enabled the transformation of these originals into downloadable and streaming services; users increasingly consume such services using personal devices such as laptops, tablets, and cell phones. GDP statistics for many countries, including the United States, include investment measures for computer software and databases, R&D expenditures, and artistic originals.

Access to financing is an essential component of the translation of inventions to innovations, both for new and growing firms. The difficulty of entrepreneurs obtaining financing contributes to the “valley of death,” the inability of new and nascent firms to obtain financing to commercialize their inventions and technology. New entrepreneurs and startups rely on their own funds as well as funds from friends and family, bank loans, venture capital, angel investment, or government support (OECD 2014:174). Venture capital investment also supports product development and marketing, company expansion, and acquisition financing.

Global venture capital investment, measured in current dollars, reached a historic high of $271 billion in 2018, more than a 50% increase over the 2017 total and nearly four times as high as its level 5 years ago (Figure 8-22). Over the last decade, the venture capital market has shifted from a U.S.-centric structure toward a more globalized market with the Asian region, primarily China, as a rapidly growing recipient of investment. As the leading recipient country of venture capital investment in 2018, the United States received 44% ($119 billion) of total global venture capital funds (Figure 8-22). China, the second-largest recipient, received $97 billion in venture capital funds representing a global share of 36% (Figure 8-22). The third-largest recipient, the EU nations, collectively received an 8% share (Figure 8-22). Five Asian countries—India, Indonesia, Japan, Singapore, and South Korea—collectively received 7% of global venture capital (Table S8-62). ICT-producing industries and health care industries were the largest recipients of these investments in the United States over the last several years, according to private-sector data (PitchBook and National Venture Capital Association [NVCA] 2019).

Venture capital in the United States has risen overall in the past 5 years. Since 2014, investment in the United States has surpassed the previous high of $51 billion set during the run-up in venture capital associated with the dot-com bubble in 2000 (Table S8-62). However, during this recent period of robust global investment growth, the U.S. global share dropped from 68% in 2013 to 44% in 2018; faster growth in the funds received by Asian economies including China, India, Indonesia, and South Korea accounted for the shift (Table S8-62).

The U.S. corporate sector and Chinese investors have been two important drivers of U.S. venture capital investment over the last several years. The U.S. corporate share of U.S. venture financing increased from 32% to 51% between 2013 and 2018 (PitchBook and NVCA 2019). U.S. corporations, particularly large Internet and software companies—Alphabet, Amazon, Facebook, and Microsoft—have made major investments in startups. For example, Alphabet’s venture arm, GV, has at least $2.4 billion in assets under management and aims to invest $500 million in startups per year (PitchBook and NVCA 2019).

Investors from China have also contributed to the recent growth of U.S. venture capital, financing 17% of U.S. venture capital investment in 2018 compared with 3% in 2013 (Figure 8-23). China’s growing wealth and its government’s push to develop and commercialize technologies, such as artificial intelligence, have prompted increased Chinese investment in U.S. startups (Dwoskin 2016).

Two industry sectors—information and communication, and health care—received the majority of investments over the last several years. In 2018, investment in these two sectors was a combined $77 billion, accounting for 65% of total U.S. venture capital investment (Table 8-6 and Table S8-62). Within the information and communication industry sector, the software industry received $39.8 billion, the largest of any industry (Table 8-6). In the health care sector, the pharmaceutical and biotechnology industry received the greatest investment at $18.7 billion (Table 8-6).

According to PitchBook’s market and technology classification, technology areas with significant and rising levels of U.S. investment included mobile, artificial intelligence, industrials, big data, and financial technology (Figure 8-24 and Table S8-65).^{​PitchBook classifies venture-backed firms based on their primary industry. See Table S8-63 for a description of PitchBook’s industry and technology classification. PitchBook further classifies these industries into technology-focused groups, such as health technology, nanotechnology, and artificial intelligence.} These five technology areas comprised 63% of total U.S. venture capital investment in 2018 compared with 39% in 2013 (Figure 8-24 and Table S8-62). These technology areas rely on software, the industry that has attracted the largest amount of investment of any U.S. industry. Artificial intelligence had the fastest growth rate among these technologies, rising sevenfold to reach $16 billion in 2018 (Figure 8-24). Large Internet corporations, including Alphabet, Facebook, and Microsoft, heavily invest in R&D and venture capital in artificial intelligence startups.

Venture capital investment in China has increased rapidly, reaching $97 billion in 2018 (Figure 8-22). Both domestic and international investors provide venture capital investment in China. In 2018, U.S. investors financed $53 billion of China’s venture capital, up from $2 billion in 2013 (Figure 8-25).

According to PitchBook’s primary industry classification, the ICT industry sector was the largest recipient of venture capital investment in China in 2018 ($54.5 billion), accounting for slightly more than half of total investment (Table 8-7 and Table S8-64). Software received by far the most investment ($45.5 billion) among the seven ICT industries (Table 8-7). The transportation industry received $13.5 billion (14% of total investment), up from less than $200 million in 2013 (Table 8-7 and Table S8-64). The health care sector received $6.2 billion, a far smaller share (6%) of China’s investment compared with that of the United States (27%) (Table 8-6, Table 8-7, and Table S8-64).

According to PitchBook’s industry vertical classification, five technology areas—mobile, industrials, mobile commerce, financial, and e-commerce—were among the top recipients of China’s venture capital investment (Figure 8-26 and Table S8-65). Investment in each of these areas grew from $1 billion or less in 2013 to $19 billion to $36 billion in 2018 (Figure 8-26 and Table S8-65). Mobile, mobile commerce, financial, and e-commerce all rely on software, which in turn led all industries in attracting venture capital investment (Table S8-64).

Since 2008, the U.S. Census Bureau and the National Science Foundation have collected comprehensive company-level data on innovation (i.e., counts of new goods and services), as well as counts of improved processes for production and distribution for U.S. companies (with five or more workers). According to these data, 17% of firms (one in six) introduced a new product or process from 2014 to 2016; this incidence rate was higher in manufacturing compared with other industries (Table 8-8 and Figure 8-27). By this measure, a larger number of firms in the nonmanufacturing sector report an innovation than in the manufacturing sector; as a proportion of all firms, however, 15% of nonmanufacturing firms, compared with 33% of manufacturing firms, report an innovation (Table 8-8 and Figure 8-27). 

Within the manufacturing sector, the chemicals, transportation equipment, and medical equipment and supplies industries have rates above 35% (Figure 8-28). Research-intensive industries that overlap with technology areas with large public investments have high rates of innovation, including pharmaceuticals. The navigational, measuring, electromedical, and control instruments manufacturing industry reports an incidence rate of 60% (Figure 8-28). Outside of manufacturing, in addition to the ICT-producing industries discussed earlier, health care services; architectural, engineering, and related services; wholesale trade; and scientific R&D services have incidence rates above the nonmanufacturing average (Figure 8-29).

ICT-producing industries span the manufacturing, information, and service sectors. They cover computer and electronic products manufacturing, software publishing, information and data processing, and computer system design. These ICT industries report among the highest rates of innovation (Figure 8-28 and Figure 8-29).

Cross-country comparisons of business innovation rates provide a measure distinct from R&D that offers an indication of international competitiveness. These international comparisons are collected under The Oslo Manual (OECD/Eurostat 2005) and show differences in rates of firm product and process innovation (Table 8-9). Although these statistics exhibit increasing harmonization across methodology and survey concepts, international comparability may be limited due to ongoing survey differences.^{​The Oslo Manual was revised in 2018. The data included in this report, however, were gathered under the guidance of the 2005 Oslo Manual.}

Despite differences in how countries measure innovation, broad patterns emerge. Relatively small economies focused on S&T, such as Finland, Israel, and Switzerland, report some of the highest rates of product and process innovation (Table 8-9). As measured, the United States, Japan, and the United Kingdom rank lower in reported incidence rates (Table 8-9).

Many countries set the creation of new products and processes through innovation as a key national goal. There is broad consensus that S&T policy and economic policy at the national level should encourage and support innovation; economic growth and advancements in knowledge serve as important justifications for increased investment in S&T (OECD 2016). In addition to products and processes, longer-term impacts of innovation are also often targets of interest. This section closes with two indicators of the translation of technology into the economy: technology-driven productivity growth and the growth of small firms in the United States.

Multifactor productivity (MFP), an internationally comparable indicator of the impact of innovation and technological change on economic growth, is calculated by dividing output measures by input measures. The source data come from national production accounts, the source of GDP statistics. The data presented in this section show a moderation of MFP across several high-income economies. In the United States, MFP grew faster on average between 1995 and 2007 compared with the first half of the 1990s, and growth has slowed since 2007 (Figure 8-30). Labor productivity, which indicates the amount of output for each unit of labor, has also moderated in the United States since 1995 (Figure 8-30).

This moderation in the MFP growth rate is evident in other high-income economies as well, including France, Germany, Japan, and the United Kingdom (Figure 8-31). South Korea has seen some moderation in MFP, yet its average growth rate remains high relative to the rest of OECD (Figure 8-31).

Innovation also affects the economy through entrepreneurship and firm creation. Firm-level data from the U.S. Census Bureau’s Business Dynamics Statistics provide information on establishments opening and closing, firm startups and shutdowns, and associated employment impacts. Based on U.S. Census Bureau data, half of U.S. firms were 5 years old or younger in 1982; this share has steadily declined, leveling off at about a third between 2012 and 2016 (Figure 8-32). Young firms accounted for 19% of employment in 1982 but only 10% in 2016 (Figure 8-32).