Experimental Industry Estimates in BEA’s R&D

Satellite Account

Carol A. RobbinsIndustry Accounts Data Users Meeting

October 26, 2007

www.bea.gov 2

Purpose of R&D Satellite Account

Treat R&D as investment in an experimental framework

Part of broader BEA program to improve measures of intangibles in national accounts

The importance of updating economic measurements given advances in the knowledge economy

The challenges in measuring intangibles Both conceptual and data-related

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The Importance of Updating Economic Measurements – Past Efforts

Note: Data through the final estimate of 2007Q2

$0

$2

$4

$6

$8

$10

$12

$14

$16

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

[GDP, Trillions of dollars]

1985 ― Worked with IBM to develop more accurate, quality-adjusted, computer prices.

2003 ― Share of GDP using quality-adjusted prices rises to nearly 1/5 of GDP.

2001 ― Introduced quality-adjusted prices for LANs

1999 ― Recognized investment in software and Introduced new services measures that capture the effect of new technology.

1996 ― Introduced chain-type measures of real GDP that better reflect the prices of high-tech and introduced new semi-conductor prices.

2006 – BEA published preliminary R&D accounts

2007 – BEA published updated R&D accounts

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Why Recognize R&D as Investment?

Economic theory: Expenditures on tangible and intangible products that

reduce current consumption in order to increase future output should be treated as investment

National Accounting Consistency Most R&D activities have the qualities of a produced asset

Improved measurement of R&D important for: Identifying sources of economic growth Monetary, tax, regulatory and other policies through

improving the accuracy of GDP estimates

Why R&D at this point? Good data on R&D expenditures collected by the National

Science Foundation for over 50 years

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Where Does R&D currently show up in the components of GDP?

Personal consumption expenditures Gross private domestic investment

Fixed investment Nonresidential

Structures Equipment and software

Residential Change in private inventories

Government consumption expenditures and gross investment Federal State and local

Net exports of goods and services Exports Imports

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Changes to National Accounts

Gross Domestic Product Gross Domestic Income

Treatment in Current

Measure of GDP Adjusted GDP

Change in Current Measure

of GDP Adjusted GDI

Capitalizing R&D Change in Current

Measure GDI

R&D Imputations, R&D performed by:

Business Intermediate Reallocate to investment Increase Increase in profits Increaseinput and depreciation

Nonprofit Consumption 1) Reallocate to investment No change Increase in IncreaseInstitutions (PCE) 2) Increase consumption = Increase returns to R&D

Returns to R&D capital capital

General Government 1) Reallocation to investment No change Increase in IncreaseGovernment consumption 2) Increase consumption = Increase returns to R&D

Returns to R&D capital capital

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New in the 2007 Release Satellite account extended two years:

1959-2004. Building on 2006 SA, includes several

enhancements: Improved measures of prices for R&D. Adjusts R&D investment for international

trade in R&D services. Adjusts for the double-count with previously

capitalized R&D in software investment. Includes a preliminary estimate of R&D

investment in social sciences based on Economic Census data.

www.bea.gov 8

New in the 2007 Release (cont’d)

First look at industry-level estimates of R&D investment (1987-2004). Impact of R&D as investment on

gross output and value added for R&D-intensive industries

First look how the international and regional accounts would implement the capitalization of R&D.

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Industry Detail : R&D Intensive Industries

Manufacturing Detail: Chemical excluding Pharmaceutical

Pharmaceutical and medicine

Computer & electronic products

Communications equipment

Semiconductors

Navigational/measuring/medical/control instruments

Motor vehicles, trailers and parts

Aerospace and other transportation equipmentServices Detail:

Software publishing

Computer systems design and related services

Scientific R&D services

www.bea.gov 10

Industry Impacts

Impacts industry gross output and value added.

Business investment in R&D by industry split: Own account Purchased R&D

Purchases of nonscientific R&D added.

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Trends in top four R&D producing industries

[% of Private Business Investment in R&D]

Motor Vehicles 11.4%

Motor Vehicles 8.3%

Aerospace 11.0%

Semiconductors& electric components, 9.4%

Pharmaceuticals 8.0%

Semiconductors& electric components 8.8%

Software publishers 8.1%

Pharmaceuticals 20.0%

1987 2004

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Business R&D Investment's Contribution to Real GDP Growth, 1987 to 1995 and 1995 to 2004

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

1987-1995 1995-2004

TransportationEquipmentManufacturingR&D

InformationCommunicationTechnologyProducingIndustries R&D

BiotechnologyR&D

All Other IndustryR&D

3.5% of real GDP growth(0.10 percentage point out of 2.8 percent real GDP grow th)

4.6% of real GDP growth (0.16 percentage point out of 3.3 percent real GDP growth)

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Company to Establishment AdjustmentWhere within pharmaceutical and medicine

manufacturing companies is R&D performed?

All Other Primary (Pharma & Medicine)

Management of Companies

Wholesale Trade

All Other Chemical

Scientific R&D Services

Nav/Measuring/Medical/ Control

Instruments mfg

What we know: company employment by type of establishment

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Example: Pharmaceutical and Medicine Manufacturing: 2004 $billions

Unadjusted

Adjustment

Adjusted

Gross output 155.4

Plus: Own account R&D 10.9

Less: own account R&D software double-count

(0.1)

Gross Output 166.2

Intermediate Inputs 83.7

Less: Purchased R&D 29.7

Intermediate Inputs 54.0

Value Added 71.7 112.2

Addendum: R&D investment 40.6

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Upcoming Conceptual and Data Challenges for the Industry

Estimates Company to Establishment

Conversion R&D investment in humanities, social

sciences, and other non-science areas

Improving inter-industry and inter-sector sales and purchases

Incorporate into the Benchmark Framework