Fact of the Week: Each Dollar of R&D Investment in the United States Returns $5 in Social Gains
Source: Benjamin F. Jones and Lawrence H. Summers, “A Calculation of the Social Returns of Innovation,” NBER Working Paper 27863, September 2020.
Commentary: While the costs of innovation efforts are often high due to the expensive and trial-and-error nature of scientific R&D, innovations produce robust social value beyond the private gains of the innovating firm. For one, spillover effects occur as follower-firms across the economy adopt applicable innovations that investing firm and enjoy subsequent productivity growth. While one firm might bear the costs, many reap the benefits. Beyond productivity, innovations in fields such as life sciences can improve health outcomes, both of which elevate living standards.
To calculate the aggregate social value of multiple benefits created by innovation investment, Northwestern University economist Benjamin Jones and former Treasury secretary Lawrence Summers compiled economic proofs incorporating real data on U.S. and global growth and R&D. To account for the full social value imbued by R&D investment, their model corrects for time delays between research investment and observed enhancements in productivity for capital-embodied and disembodied investment, learning-by-doing, health outcomes, inflation bias, and international spillovers. Employing conservative corrections, they conclude the social benefits of innovation investments substantially exceed private R&D costs.
In the case of the United States, their model suggests that each dollar of R&D investment, when accounting for the full range of positive externalities, yields an average return of $5 total in social gains. Given the scale of value incurred due to innovation investment, policymakers should prioritize increasing government R&D expenditures and improving private incentives for innovation investment.
