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Policy

Valuing R&D

Poor economic models and barriers to research collaboration are stifling U.S. innovation

by David J. Hanson
January 4, 2010 | A version of this story appeared in Volume 88, Issue 1

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Problems with collaborative research between industry and academe threaten product innovation.
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Problems with collaborative research between industry and academe threaten product innovation.

Much is said about the importance of research, development, and innovation to the U.S. economy. The National Academy of Sciences composes weighty reports on the subject, Congress debates how many tax dollars to devote to science and technology, and corporations tout the value of their research portfolios.

Unfortunately, there is not an obvious or accurate way to put a value on research. At a recent conference sponsored by the Council for Chemical Research (CCR) and the National Science Foundation, economists, federal policymakers, and industry officials examined how R&D is valued. They concluded that current methods are inadequate and that a number of systemic problems hinder research progress, but conference speakers were not able to offer many ideas for solutions.

“We have a disconnect between the values of long-term and short-term research, applied versus basic research, and what industry and universities are expected to do,” said Hratch G. Semerjian, president of CCR, after the conference. “We keep saying that we need more R&D investment in this country, but we don’t know what the right size of that investment should be.”

The conference was a companion to an earlier meeting that discussed intellectual property issues in chemical industry research. It builds on a report done several years ago by CCR on measuring R&D value.

Arden L. Bement Jr., director of NSF, opened the meeting by saying government is making a commitment to developing the science of science policy and that this conference would provide input into shaping that policy (C&EN, May 4, 2009, page 40). “We need evidence-based metrics to describe the impact of the research and development investment,” Bement said. “And these metrics can provide something even more important for our future: insights.”

The conference covered a number of areas. Three that recurred were the undervaluation of corporate R&D, the increasing problems with R&D collaborations between industry and academia, and the need for better federal innovation planning.

Academic economists have a hard time assigning value to industrial R&D. Bronwyn H. Hall, an economics professor at the University of California, Berkeley, told conference attendees that her attempts to quantify the return on investment for research by the chemical industry showed that the models used for calculating productivity from R&D don’t work very well. She said that a variety of factors, including depreciation rates, heterogeneity of the firms doing R&D, the attempt to consider social returns on investment, and the many different types of R&D being performed, contribute to these challenges.

Hall made the point that R&D investment is essentially an investment in people and knowledge and that neither quantifies well. It’s not clear how one depreciates knowledge or puts a value on replacing researchers, she pointed out.

More public information could improve the situation. “Studies have found that with better disclosure of research information, you get better capital markets,” according to Baruch Lev, a professor of accounting and finance at the New York University Stern School of Business. Lev has studied chemical industry finances and found that smart disclosure of research information can improve a company’s capital returns by giving financial analysts, who often undervalue research investments because they lack information, more material to work with. “Disclosure of corporate R&D and innovation activities by high-technology firms positively affects their stock prices,” Lev concluded.

As Hall and Lev detailed and other speakers agreed, not having good models for calculating R&D performance and not having enough company information about innovation activity lead to chemical companies’ stocks being undervalued. Several studies were also presented that showed this is the case.

Lev also broached the topic of using accounting practices to require increasing corporate disclosure. Calling current U.S. accounting practices outdated, Lev noted that international accounting standards take a different approach. They consider R&D as an asset and not as an expense. Making this kind of accounting change would allow investors to see research as providing future benefits and might also improve corporate stock values, Lev said.

One place in which at least some information about company research can be found is in the scientific literature. Publication of research results by industrial scientists, however, is not common. Fionna E. Murray, who teaches entrepreneurship and innovation at the Massachusetts Institute of Technology Sloan School of Management, pointed out wide disparities between the number of chemical research articles published by academic chemists and that by chemists employed by industry. For example, in 2005, out of 19,521 U.S. chemistry research papers published, only 2,743 had at least one industry author, Murray said.

Murray thinks one result of the chemical industry’s tendency to not publish is that industry research is becoming decoupled from chemical research being done at universities. The result is that university chemistry departments are becoming less likely to collaborate with industry. Murray said one reason for this trend may be that industry finds that academics don’t stay focused solely on the industry problems, and thus the university research becomes less relevant to industry over time. Additional reasons, she said, may be that federal grant rules do not mix well with industrial research and that academic training does not effectively translate to working in industry.

The problem, however, is not one-sided. Industry representatives at the conference noted that universities have also changed, making collaborations less attractive. Many top-tier research universities aggressively pursue patents for the discoveries they make and do not want to share profits with companies, they said. Many academic chemists do not want to forego publication of their research, as some industry collaborations require. This adds tension to the industry-university relationship, conference participants claimed. For these reasons, many U.S. companies, it seems, have chosen to collaborate with researchers in other countries, where the concerns of patents and publications are not as prevalent.

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Calculating a corporate value for industrial R&D has proven to be difficult for economists.
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Calculating a corporate value for industrial R&D has proven to be difficult for economists.

Concern about the health of industrial R&D was on the minds of other speakers. Robert J. Cava, chairman of the department of chemistry at Princeton University, noted that government, universities, and industry all must work cooperatively for successful innovation. “I’m worried that the industrial leg is not healthy,” Cava said, contending that the people looking for the big-picture, long-term solutions to problems are not working in industry.

Although most of the struggle to understand how to value research and innovation focused on industry and academe, the federal government has an important role as well, namely in supporting the national laboratories and in establishing standards and policies.

National labs and other federal science facilities provide stability and continuity for research that companies cannot, according to Cava. They provide equipment and an infrastructure for science that is too expensive for companies and universities. And publicly available data from these labs can be used for corporate innovation.

Establishing such an infrastructure that supports research is an important government function. John T. Scott, economics professor at Dartmouth College, argued that public spending on what he terms “infrastructure technology” has a large societal benefit. The scope of this public infrastructure technology includes everything from science education and pollution prevention to the development of chemical standards at the National Institute of Standards & Technology.

“Private R&D spending increases with public spending on infrastructure technology,” Scott said. This is because these fundamental technologies remove barriers to innovation and give privately funded research higher value. “If you have public policies that increase the value of commercialization of research, the result will be shifting the value of that research higher.”

Unfortunately, U.S. policies on research and innovation fall short of that ideal. NIST Senior Economist Gregory C. Tassey told conference attendees that the current policy ignores the innovation process that comes between building the fundamental science base and the commercialization of products, leaving it up to industry to pay for innovation on its own. Tassey thinks the federal role in funding research needs to be restructured because it is not providing the most public good for the huge amount of investment that is being made. “We need to look for specific barriers to innovation and match those with our policy responses,” he said.

John H. Marburger III, past science adviser to the President and currently interim vice president for research at the State University of New York, Stony Brook, said at the conference that no one really does strategic planning for research within the government. “Science funding is distributed to dozens of agencies, and any planning is fragmented within the agencies. The result is a ‘stovepipe’ collection of activities that becomes the President’s budget and is presented to Congress, where it is messed with again,” he said.

The system that takes basic research and moves it to product innovation is complex, and Marburger does not think the U.S. government takes that complexity into account. “We really need to change this system,” he saidw. “We have a very awkward form of government to work through.”

Julia I. Lane, who manages the Science of Science & Innovation Policy program at NSF, said one of the conclusions to be drawn from this conference is that more collaboration is needed among all the parties in chemical science for research investments to be optimized. “Although fundamental research is intrinsically risky and long-term, it seems essential to finds ways to accelerate the discovery-to-innovation process for research that is destined to have economic impact,” she said. “It is clear, however, that the information needed to accomplish this is not as good as it should be.”

Lane, an economist, said the workshop addressed the challenging social science question of how to go about assessing what an optimal investment in chemical research might be. “It is important to get social scientists together with physical scientists so they can get a better understanding of research and innovation. I see activities like this as critical to creating a sound empirical foundation for U.S. science policy,” she said.

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