Experimental Industry Estimates in BEA’s R&D Satellite Account Carol A. Robbins Industry Accounts Data Users Meeting October 26, 2007

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

3 The Importance of Updating Economic Measurements – Past Efforts Note: Data through the final estimate of 2007Q2

4 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

5 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

6 Changes to National Accounts

7 New in the 2007 Release  Satellite account extended two years:  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.

8 New in the 2007 Release (cont’d)  First look at industry-level estimates of R&D investment ( ).  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.

9 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 equipment Services Detail: Software publishing Computer systems design and related services Scientific R&D services

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.

11 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%

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

13 Company to Establishment Adjustment Where within pharmaceutical and medicine manufacturing companies is R&D performed? What we know: company employment by type of establishment

14 Example: Pharmaceutical and Medicine Manufacturing: 2004 $billions UnadjustedAdjustmentAdjusted Gross output155.4 Plus: Own account R&D10.9 Less: own account R&D software double-count (0.1) Gross Output166.2 Intermediate Inputs83.7 Less: Purchased R&D29.7 Intermediate Inputs54.0 Value Added Addendum: R&D investment40.6

15 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