Washington DC - On an agenda dominated by COVID, climate change, and geopolitics, President Biden’s proposal for a global minimum tax is the main economics issue at the annual G20 Summit in Rome this week. Many governments are eager to collect more tax revenues without having to worry that raising rates will chase businesses—or their earnings—to more competitive jurisdictions. But instead of seeking to restrict businesses, Biden and his counterparts would be better off discussing policies that encourage them to innovate and drive productivity, which is essential to economic growth.
In the words of Nobel prize-winning economist Paul Krugman, “Productivity isn’t everything, but in the long run it is almost everything.” Productivity growth measures the increase in output generated from a set level of inputs, which frees up resources and creates wealth. But to get productivity growth, we need investment.
The value of tomorrow’s output, the quality of our jobs, and our standards of living are all functions of today’s investments. The U.S. economy, positioned at the technological frontier, requires a continuous flow of capital investment to conduct research and replenish the machinery, software, laboratories, and high-end manufacturing facilities that harness our potential, animate new ideas, and generate innovation that improves our lives.
These firms and industries, which invest large sums in research and development, are often referred to as innovative or intellectual property-intensive (“IP-intensive”). According to a new report published by ndp | analytics, the economic performance of these IP-intensive manufacturing industries far exceeds the performance of “non-IP-intensive” manufacturing industries across a variety of relevant economic metrics. (IP-intensive industries are defined as those for which the average R&D expenditures (per worker) exceeds the manufacturing sector average R&D expenditure. Non-IP-intensive industries are those with below manufacturing sector average R&D expenditures.) Comparing annual averages over a 10-year period (2009-2018), IP-intensive industries generated 40 percent more output per worker; 60 percent more GDP per worker; 160 percent more export value per worker; and they paid 40 percent higher wages than non-IP-intensive industries
Beyond these direct economic contributions, IP-intensive industries generate many less easily quantifiable benefits. The full impact includes the effects these companies have on the U.S. economy over time through technology spillovers, the evolution and hybridization of ideas, corporate governance policies, environmental stewardship, and positive impacts on social mobility and other labor market considerations. The competition inspired by these IP-intensive firms raises broader U.S. economic performance in perpetuity.
For example, during the pandemic the value to society of our IP-intensive industries has been demonstrated clearly and repeatedly. The speed with which vaccines for a previously unknown virus were developed, tested, produced, and distributed, and the advent and dissemination of new communications and collaboration technologies which have enabled businesses to continue operating and people to visit with loved ones despite travel bans would have been impossible but for the investments in R&D and intellectual capital from our innovative industries.
With the world’s largest consumer market, a productive workforce, an innovative culture, deep and broad capital markets to commercialize innovation, and laws to protect that innovation, the U.S. has enormous advantages in the global competition to attract and retain the world’s best IP-intensive companies. But we cannot take this investment channel for granted.
Today companies have many options when it comes to where and how they develop and produce. Governments are competing to attract investment and their policy environments can help or hinder. Consideration of taxes, regulations, trade openness, IP protection, access to skilled workers, infrastructure, and dozens of other policy matters factor into decisions about whether, where, and how much to invest. Clear and consistent rules, political stability, protection from expropriation and IP theft, as well as skills of the labor pool, infrastructure quality, and size of the market are all important investment determinants. Unduly high taxes, oppressive regulatory regimes, an uncertain business climate, and breakdowns in the rule of law are among the repellants that stifle investment from IP-intensive firms.
To remain the world’s preeminent innovation economy, the U.S. must ensure that its tax and regulatory policies, IP protections, trade and immigration policies, infrastructure and labor force quality, and its business and political climates serve to encourage investment in research and development. Whether that investment is generated through business profits in the U.S. or by inflows of capital from abroad, R&D expenditures are essential to U.S. economic growth.
But the capital investment must be continuous and responsive to technological changes and other emerging developments. The technology-trade war, for example, among the U.S., China, and others requires that governments and businesses do more to protect IP. This doesn’t just mean thwarting efforts by rogue players to steal the fruits of innovative companies, but also to oppose misguided proposals—however well intentioned—to waive international commitments to respect IP under the false pretense that this will hasten the manufacture of COVID vaccines.
While President Biden may tout his plan for a global minimum tax in Rome, he and his G20 counterparts should focus their attention on the policies that attract innovative firms and motivate them to produce the IP-intensive goods and services that raise living standards and our quality of life.
Dan Ikenson
I am Director of Policy Research at ndp | analytics in Washington, DC (www.ndpanalytics.com).
The value of tomorrow’s output, the quality of our jobs, and our standards of living are all functions of today’s investments. The U.S. economy, positioned at the technological frontier, requires a continuous flow of capital investment to conduct research and replenish the machinery, software, laboratories, and high-end manufacturing facilities that harness our potential, animate new ideas, and generate innovation that improves our lives.
These firms and industries, which invest large sums in research and development, are often referred to as innovative or intellectual property-intensive (“IP-intensive”). According to a new report published by ndp | analytics, the economic performance of these IP-intensive manufacturing industries far exceeds the performance of “non-IP-intensive” manufacturing industries across a variety of relevant economic metrics. (IP-intensive industries are defined as those for which the average R&D expenditures (per worker) exceeds the manufacturing sector average R&D expenditure. Non-IP-intensive industries are those with below manufacturing sector average R&D expenditures.) Comparing annual averages over a 10-year period (2009-2018), IP-intensive industries generated 40 percent more output per worker; 60 percent more GDP per worker; 160 percent more export value per worker; and they paid 40 percent higher wages than non-IP-intensive industries
Beyond these direct economic contributions, IP-intensive industries generate many less easily quantifiable benefits. The full impact includes the effects these companies have on the U.S. economy over time through technology spillovers, the evolution and hybridization of ideas, corporate governance policies, environmental stewardship, and positive impacts on social mobility and other labor market considerations. The competition inspired by these IP-intensive firms raises broader U.S. economic performance in perpetuity.
For example, during the pandemic the value to society of our IP-intensive industries has been demonstrated clearly and repeatedly. The speed with which vaccines for a previously unknown virus were developed, tested, produced, and distributed, and the advent and dissemination of new communications and collaboration technologies which have enabled businesses to continue operating and people to visit with loved ones despite travel bans would have been impossible but for the investments in R&D and intellectual capital from our innovative industries.
With the world’s largest consumer market, a productive workforce, an innovative culture, deep and broad capital markets to commercialize innovation, and laws to protect that innovation, the U.S. has enormous advantages in the global competition to attract and retain the world’s best IP-intensive companies. But we cannot take this investment channel for granted.
Today companies have many options when it comes to where and how they develop and produce. Governments are competing to attract investment and their policy environments can help or hinder. Consideration of taxes, regulations, trade openness, IP protection, access to skilled workers, infrastructure, and dozens of other policy matters factor into decisions about whether, where, and how much to invest. Clear and consistent rules, political stability, protection from expropriation and IP theft, as well as skills of the labor pool, infrastructure quality, and size of the market are all important investment determinants. Unduly high taxes, oppressive regulatory regimes, an uncertain business climate, and breakdowns in the rule of law are among the repellants that stifle investment from IP-intensive firms.
To remain the world’s preeminent innovation economy, the U.S. must ensure that its tax and regulatory policies, IP protections, trade and immigration policies, infrastructure and labor force quality, and its business and political climates serve to encourage investment in research and development. Whether that investment is generated through business profits in the U.S. or by inflows of capital from abroad, R&D expenditures are essential to U.S. economic growth.
But the capital investment must be continuous and responsive to technological changes and other emerging developments. The technology-trade war, for example, among the U.S., China, and others requires that governments and businesses do more to protect IP. This doesn’t just mean thwarting efforts by rogue players to steal the fruits of innovative companies, but also to oppose misguided proposals—however well intentioned—to waive international commitments to respect IP under the false pretense that this will hasten the manufacture of COVID vaccines.
While President Biden may tout his plan for a global minimum tax in Rome, he and his G20 counterparts should focus their attention on the policies that attract innovative firms and motivate them to produce the IP-intensive goods and services that raise living standards and our quality of life.
Dan Ikenson
I am Director of Policy Research at ndp | analytics in Washington, DC (www.ndpanalytics.com).
