Virtually all major fields of science contribute 

 to technological innovation, but certain fields are 

 particularly significant, as indicated in the table 

 above. The physical sciences (especially 

 chemistry and physics) are of general impor- 

 tance across the entire spectrum of industrial 

 innovation. The significance of the biological 

 sciences and medicine has increased considerably 

 in the last decade, both in their direct and 

 indirect contributions to innovation. 



RETURNS FROM R&D AND INNOVATION 



The contribution of R&D and innovation to 

 the economy and society is presently understood 

 in broad and general terms only. Existing 

 knowledge of the subject is fragmented and 

 tenuous, to an extent which prohibits the 

 development of indicators of the kind presented 

 elsewhere in this report. Several studies, how- 

 ever, have been conducted in the area, par- 

 ticularly in the last decade. Some of the major 

 findings of these studies are summarized below 

 in the form of tentative conclusions based upon 

 the collective results of these investigations. 



The findings from the various studies, in- 

 cluding estimated rate of returns from invest- 

 ment in R&D and innovation, are not strictly 

 comparable. The studies employ different con- 

 cepts, assumptions, and methodologies; each has 

 limitations regarding the specification of inputs, 

 the level of aggregation and the availability of 

 data, and the method and degree of attribution 

 of calculated outputs. They, in addition, have 

 one major limitation in common — the inability of 

 conventional measures (such as the Gross 

 National Product and output per man-hour) to 

 capture the full impact of technological innova- 

 tion on the economy and on society. For these 

 and other reasons of a methodological nature, 

 findings regarding the contributions and returns 

 from R&D and innovation appear to be un- 

 derestimated in general (l).*^ 



The contribution of R&D to economic growth nnd 

 productivity is "positive, significant, and high"(2). This 

 contribution occurs through technological in- 

 novation consisting of enhanced production 

 processes and new and improved products and 

 services. These may expand economic output, 

 increase productivity, or reduce unit costs. Such 



5" These numbers refer to the references provided at the 

 end of this chapter. 



innovation is regarded as an important — 

 possibly the most important — factor in the 

 economic growth of the United States in this 

 century (3-5). 



Investment in R&D and innovation yields a rate of 

 return as high — and often higher — than the return from 

 other investments. This applies to investments for 

 specific innovations by both the public and 

 private sectors and to R&D investments by 

 individual industries. Rates of return from 

 specific innovations are estimated, conservative- 

 ly, to average between 10 and 50 percent per 

 year (6-11), while returns to innovating in- 

 dustries in the form of productivity growth 

 range from 30 to 50 percent (12-21). 



The benefits to industries which purchase new and 

 improved products from innovating firms may equal or 

 exceed the direct returns to the innovating firms themselves. 

 These benefits occur particularly in the form of 

 reduced costs or prices per unit of output in the 

 industries which purchase and use the in- 

 novations. The rate of return to these industries 

 is estimated to range from 20 to 80 percent per 

 year (22-24). 



Industry may underinvest in R&D and innovation with 

 respect to the probable returns to the firm and the benefits to 

 society (25-27). Firms may invest less than the 

 average returns to them would warrant because 

 of the uncertainty and risk associated with 

 specific innovation efforts, as well as the lengthy 

 time before returns can be expected, and the 

 scale of investment which is often involved in 

 innovation. Although the potential benefits to 

 society may often exceed the cost of innovation, 

 a firm may not be able to translate enough of 

 these benefits into profits to justify the 

 necessary investment. "This is particularly true 

 of basic research, where the output frequently 

 occurs. . . not as a marketable product but rather 

 as an advance in basic knowledge that can 

 subsequently be used in applied research and 

 development by a wide and often unforeseeable 

 range of firms" (27). 



Standard indices of economic performance reflect only 

 part of the contribution which R&D and innovation make 

 to the economy and society (28). Technological 

 innovation sometimes results in new products 

 (e.g., antibiotics and the airplane) which satisfy 

 material needs and wants not satisfied previous- 

 ly. The value of such innovations may far exceed 

 the price paid for the products, although only the 

 latter is counted in standard economic measures. 

 In addition, the effects of qualitative im- 

 provements in products and services (e.g.. 



110 



