The Best Policy

Inventing a New Economy

What patent applications can tell us about America’s economic prospects.

As the economic cataclysm of the past two years has unfolded, there has been no shortage of data to help us understand what has already happened and what might happen next. GDP growth, unemployment rates, trade and federal deficit levels, inflation rates, foreclosure rates, capital and leverage ratios—all have been paramount in our conversation.

As we continue to parse the economy and try to understand what the future holds, I want to focus occasionally on some numbers that do not typically generate headlines the way that, say, the monthly unemployment numbers do. Yet over the long run, these statistics may be a more important part of the larger economic story line. I call them “other numbers that matter.”

The first of these data sets relates to patent applications. America’s overall economy, we are often told, is increasingly reliant on America’s “innovation economy.” Our national economic rebirth will be spurred by our historic ability to create new methods of production and new technologies, which will keep us one step ahead of the competition even as we lose the comparative advantage we used to have based on other factors, such as size of market or access to capital.

One way to assess our advantage in innovation is to examine our innovation-patent filings—the core intellectual foundation of production and intellectual activity. A great source for this data is the World Intellectual Property Indicators 2009.

As with all economic (or other) data, it can be interpreted in many different ways, and the everpresent danger of confusing correlation and causation remains. Nonetheless, the top-line raw data is fascinating:

A quick glance suggests several conclusions: First, the view that a worldwide technological and innovative explosion began in the mid-1960s and continues until now is correct. The sheer number of patent applications—which had remained relatively static from the 1880s until the 1950s—suddenly grew dramatically, coinciding with the onset of the computer and telecom revolutions. Second, not surprisingly, the patent offices receiving the vast majority of this explosion have been those in nations with the greatest economic growth during that period—initially the United States and Japan and more recently China, Korea, and Russia.

But patent filings tell an incomplete story. There is also the issue of patent filers: Someone who generates an idea in Peru might seek patent protection by filing for a patent with the U.S. Patent Office. So if we break out the data by the source of the filing—i.e. how many are what are called “resident” filings and how many are “nonresident”—the resulting chart is fascinating:

Over this 45-year period, the domestic share of U.S. patent filings has dropped from 82 percent to 50 percent, with the share of foreign-originated patents rising commensurately.

Another critical area of correlation—and perhaps causation—is the relationship between research and development spending in various nations and patent filings generated in those nations.

It should surprise no one that increased spending on R & D generates the patent flow that we have been discussing.

A few caveats are necessary—not about the data but about drawing quick policy conclusions from it. A patent application filed and granted in the United States by a U.S. company might not generate many jobs or much economic activity in the United States if the production and marketing of any resulting product or service took place overseas. So a critical question that remains is whether innovation in the United States will continue to have as significant and broad-based an economic impact as it has in the past. On balance, is it preferable to have Apple doing its R & D here, even if it manufactures the iPod in China? Of course it is, because the R & D here creates great value and wealth. But the loss of manufacturing jobs to the rest of the world has enormous economic consequences for the middle class.

Historically, our economic growth has depended in large part on our ability to generate new ideas and innovations. In addition, while there can be substantial discussion about which policies will best keep our innovation engine churning, increased investments in education—especially in technical fields—and basic R & D seem critical to any agenda. If we want robust economic growth to return, then we had better figure out how to reverse some of the trends suggested by this quick examination of patent data.

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