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Who Cares About R&D?

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June 17, 2005

Who Cares About R&D?

Michael Mandel

The Congressional Budget Office just released a new paper on R&D and productivity growth. In particular, they were interested in whether it made sense to add R&D to macroeconomic forecasting models. Their conclusions:

unless one is willing to assume large spillovers, the inclusion of R&D in macroeconomic models will have little effect on economic forecasts or policy simulations. Moreover, its inclusion in models does not increase understanding of the historical behavior of productivity.....Finally, it is not clear that adding R&D to macroeconomic models will improve their forecasts

or projections...In short, the benefits of adding R&D to macroeconomic models probably do not exceed the

costs of doing so.

I don't know about you, but I'm very uncomfortable with this conclusion. I'd like to know whether R&D is any more or less significant in terms of projecting future growth than, say, the budget deficit.

Remember--the answers you get depend on the questions you ask.

04:48 PM


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There is a definition problem here, with the term R&D loosely spanning a spectrum from pure and basic research, to "applied" research, to advanced development of "enabling technologies", to initial product development, to any incremental development of products (and services).

A lot of companies do product development, but only a smaller percentage do true research.

You have to ask whether you're interested in the capacity to churn out new, but not so innovative products in the short-run versus the development of the kind of new foundations that are required to enable breakthrough products 10 or 20 years down the road.

Sometimes we look at what percentage of a company's revenues are pumped into "R&D", but without regard to the R vs. D and short vs. long term breakdowns.

We're already doing a lot of "D", but we're doing an appallingly less and shrinking amount of true "R". Even the "R" that is done these days is way too tilted towards short-term "return on investment" rather than focusing on making breakthroughs.

-- Jack Krupansky

Posted by: Jack Krupansky at June 17, 2005 07:38 PM

I'm also very uncomfortable about the conclusions .

I think the CBO needs to do some more R&D so as to include national R&D into macroeconomic models; an obvious factor in this "highly developed economy".

Posted by: Ed Zee at June 18, 2005 02:47 AM

Asking whether R&D needs to be in econometric models is like asking whether financial markets need to be included in those models.

R&D (and, as Krupansky wrote, the distinction between "R" and "D" is important to the models) Is the precursor of new ventures, new products and new industries. Sure, new businesses can simply introduce "me too" products...but the massive economic benefits come from application of R&D. Where would the computer industry be, for instance, if there were no R&D on semiconductor integration in the 1960s?

R&D is, to me, the leading indicator of whether an economy grows beyond simply supplying raw materials for more progressive and thoughtful societies. R&D is the engine of entreprenuerial initiative.

Posted by: Carol Anne Ogdin at June 20, 2005 11:39 AM

I agree. If R&D doesn't seem to make a difference to the models, then the models are likely wrong.

Posted by: Michael Mandel at June 20, 2005 01:29 PM

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