Innovation Is on the Rise
St. Louis Fed economist Ana Maria Santacreu talks about the rise in innovation around the globe. She also explains three ways to measure innovation. (By one measure, China is No. 1.) Strong intellectual property rights are key to promoting innovation around the world, she points out.
This 13-minute podcast was released June 7, 2018.
Al Stamborski: Hello, I'm Al Stamborski, your host for this episode in the Timely Topics podcast series from the St. Louis Fed. With me today is Ana Maria Santacreu, an economist here at the St. Louis Fed. Thanks very much for joining us.
Santacreu: Hello, Al, it's nice to be here.
Stamborski: Today, we're going to be talking about how the world seems to be much more innovative than it has in the recent past and how we've come to that conclusion, specifically how we measure innovation. But before we get started, tell us a bit, Ana Maria, about yourself and also about your areas of research.
Santacreu: I am an economist from Spain, and I did my Ph.D. in economics at New York University. After that, I worked for five years as a professor at the (INSEAD) business school in Paris and Singapore before I joined the Federal Reserve Bank of St. Louis four years ago, where I work at the Research department.
Stamborski: And what are your areas of research here?
Santacreu: My main areas of research are on international trade, international macroeconomics and economic growth.
Stamborski: All right. So, innovation is a very timely topic. Tell us why you decided to study innovation.
Santacreu: One of my main areas of research studies what factors may explain differences in income per capita across countries. Why do we see rich countries and poor countries in the world? And since innovation is believed to be the engine of productivity growth, differences in the intensity at which countries innovate can help us explain these differences in income per capita.
Stamborski: In your writings over the past year, I see that you've looked at several different angles related to what's going on in innovation these days, including different ways for measuring growth in innovation. So, tell us about one of those measurement methods.
Santacreu: One way to measure innovative activity that is typically used by economists is to look at the number of patent applications. These are patents that have been filed within a national patent office to obtain the exclusive rights to use an innovation. And when we look at the data, what we observe is that the number of patent applications has increased dramatically, going from 824,000 in 2000 to more than double that in 2015.
Stamborski: That’s quite a jump. But before we get into details on that, just tell us briefly why you think patent applications have grown so much. Are people really that much more inventive than in the past, or is the patent application process easier or cheaper than in the past, or maybe it's more widely available than in the past. What’s behind this increase?
Santacreu: There are several reasons. One is that patents are being traded more over time, and innovators can obtain royalty payments from licensing the right to use a patent to a third party. And, in fact, when we look at the data, what we see is that there's been an increase in royalty payments to more innovative countries that also have stronger intellectual property rights. A second reason could be that now we see more patents on software. This is what is called the computer and electronic patents. And the third reason could be that there have been changes in innovation policies in OECD countries over the past two decades that have incentivized the use and enforcement of patents with the objective of encouraging innovation and investment in innovation.
Stamborski: OK, and OECD of course stands for Organization for Economic Cooperation and Development. So, who were the leaders in patent applications 15 years ago, and who are the leaders today?
Santacreu: When we look at the data, what we see is that Japan, the U.S. and the European Union were the leaders in 2000. They accounted for 81 percent of all the patent applications in the world. So, for example, Japan accounted for 47 percent, the U.S. accounted for 20 percent and the European Union accounted for 14 percent. If we look at the data 15 years later, China appears to be the leader in innovation in terms of patent applications, followed by the U.S. and Japan. China is way ahead of everyone else. It accounts for 51 percent of patent applications in the world. The U.S. is still No. 2, but its share has declined to 15 percent.
Stamborski: Why is China so far ahead of everyone else? Is it because of its enormous population?
Santacreu: There are several reasons. Technological development has been increasing in China, and that incentivizes innovation. A second reason could be, as you say, it's a larger market; it has a growing market that makes innovations also more profitable. But what I think is the main reason is that the government in China has established innovation targets in its last plans for economic and social development, and these targets want to increase patent applications from 3.3 per 10,000 people in its plan for 2011 to 12 patents per 10,000 people in its plan for 2013. What is interesting about this program is that it's targeting patent applications directly; so these are subsidies to increase the number of patent applications in China.
Stamborski: So, the government is actually paying people to apply for patents.
Santacreu: That's right.
Stamborski: And is it meeting these targets? I mean you mentioned that back in 2011, the target was 3.3 patent applications for each 10,000 people and now it's almost four times that: 12 patents for each 10,000 people. Is it actually meeting these targets?
Santacreu: Yes, it has been meeting the targets.
Stamborski: People listening to this probably are wondering, though, if patent applications is a good metric for innovation, as opposed to, perhaps, the number of patents granted. I would think that with the former it would be easy to inflate the numbers but with the latter you might get a better idea of the quality of ideas that are being brought to a patent office. Can you speak to that?
Santacreu: Absolutely. Patent applications are an imperfect measure of innovative activity. For instance, there are many innovations that are not patented. Going through the process of applying for patents in a patent office costs money and it's time-consuming. It may take months for a patent to be granted, as they have to be evaluated first by experts from the patent office. Moreover, as you mentioned, patent applications do not give a sense of the quality of the patent, and it may be better to use patents that are granted. Patents that are granted are a subset of patent applications that officials consider they are novel enough and have an impact on the economy and society.
Stamborski: So, why do you use patent applications?
Santacreu: I use patent applications in my research because I'm interested in measuring how active a firm is at doing innovation at a particular moment in time. Patents take time to be granted; so, just the fact that a firm is applying for a patent, even if it's not granted, gives me a sense of how innovative the firm is.
Stamborski: So, is there another way to measure the importance of patents?
Santacreu: Another way to measure the quality of an innovation will be to look at the patent citations. Patents that are cited more often are considered to have a larger impact in spreading knowledge. In a current paper with two other co-authors, we measure the strength of knowledge diffusion across industries and across countries by looking at patent citations. What we find is that the most cited countries are the U.S., the U.K., Germany and Japan.
Stamborski: OK, so I’ve got to confess here: I'm not exactly sure what a patent citation is. Can you give us a brief rundown?
Santacreu: Patent citations are citations that the patent receives from other patents that have been granted, and these citations are used to measure how much prior knowledge is assembled in a particular patent. One example are citations to publish articles. So, for example, when we write academic articles, we cite other papers that are related to the topic that we're writing about. This is a way of acknowledging and protecting prior work on the topic.
Stamborski: OK, I get it now. Let's backtrack to different ways for measuring innovation itself. Tell us about another way in which you've done this.
Santacreu: Another way to measure innovative activity will be to look at what is called research and development intensity. This is measured as the fraction of total output that is invested into research and development. Now, while patents are a measure of the output of an innovation, R&D intensity is a measure of the efforts of an innovation. And we tend to observe a strong correlation between the R&D intensity and the number of patents of a country. When we look at the data and intensity, we observed that most of the world’s R&D intensity is concentrated in a few countries, such as Japan, Korea, Nordic countries and the U.S.
Stamborski: So, how does the level of intensity in the U.S. compare with levels in other innovative countries?
Santacreu: When we look at data between 2005 and 2012, we see that the average R&D intensity in the U.S. was around 3 percent. This was similar to Australia and Switzerland. In Korea, Japan and Nordic countries, for example, this amounted to 3.5 percent.
Stamborski: So, research and development intensity is always measured as a percentage of a country's GDP. Is that right?
Santacreu: That's right.
Stamborski: Earlier, you mentioned royalty payments as another way to gauge a country's level of innovation. Tell us a bit more about that.
Santacreu: Royalty payments are payments that the holder of a patent receives from a third party for the right to use that patent. For example, streaming songs on the Internet or broadcasting the song on television. A country that is very innovative tends to receive more in royalties, and this is the case of the U.S., Switzerland and the Nordic countries. These are countries that have larger R&D spending and also receive large royalty income. And intellectual property rights tend to be strong in those countries that receive more in royalties.
Stamborski: And as I understand it, the United States is the leader in net royalty payments, correct?
Santacreu: That's correct.
Stamborski: Can you tell us how much more the U.S. is receiving in royalty payments than it is paying out, and also maybe tell us how this number has changed over the recent past?
Santacreu: In the last year, it has been receiving three times as much in royalty payments as it has been paying out. And this number has been pretty stable over time.
Stamborski: So, you said royalty payments are on the rise in countries with strong intellectual property rights. Tell us a bit more about that, including what's going on in China.
Santacreu: Intellectual property rights are strong in innovative countries such as the U.S., Sweden and Finland. They are not as strong in China. However, the government (in China) has been taking actions to improve intellectual property rights enforcement. For instance, it has been updating and strengthening the Internet intellectual property laws.
Stamborski: What sort of progress is China making on this front?
Santacreu: I think China still has a long way to go in improving its intellectual property rights; however, it seems that the government is taking steps in the right direction.
Stamborski: Before we close, Ana Maria, can you summarize our talk and give the listener, perhaps, three key things that you'd like them to take away from this conversation.
Santacreu: The first one would be that innovative activity has increased in the world. Second, based on R&D intensity, the U.S., Japan and Nordic countries stand out as the most innovative countries in the world. If we look at patent applications, China appears to be the most innovative country. However, patent applications are an imperfect measure of innovative activity, and they should be adjusted by the quality of the patent. The third message will be that strong intellectual property rights are key to promote innovation around the world.
Stamborski: Thank you. If you’d like to learn more about Ana Maria's research—not just on innovation but on trade and other topics—go to research.stlouisfed.org/econ/santacreu.
Economists and other experts from the St. Louis Fed talk about their research, economics-related topics in the news and issues specifically related to the Fed. Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.