Innovation—the creation of new or significantly improved products or processes, along with novel marketing activities and organizational methods—is widely recognized as instrumental to the realization of commercial value in the marketplace and as a driver of economic growth. ICT technologies, for example, have stimulated innovation of new products, services, and industries that have transformed the world economy over the past several decades. However, direct measures of innovation for the United States and many other regional/national economies remain limited. (See the section on intangible assets in this chapter and sidebar, "Developments in Innovation-Related Metrics," in chapter 4.)
Intangible assets are those that embody knowledge content, for example, patents, trademarks, and licensing of computer software (Idris 2003). These can be traded (licensed for use). The United States has a longstanding surplus in trade of intangible assets with the rest of the world (figure
U.S. receipts for exports of intangible assets were $83 billion in 2007, 14% higher than in 2006 (figure
About three-quarters of the intangible assets trade involved exchanges between multinationals and their affiliates, either with U.S. parents and their foreign affiliates or with foreign parents and their U.S. affiliates (appendix table
Despite the greater value of transactions among affiliated companies, both affiliated and unaffiliated transactions have grown at the same pace over the past two decades. These trends suggest a greater internationalization of U.S. business activity and a growing reliance on intellectual property and other intangible assets developed overseas.
A major component of U.S. intangible assets trade is industrial processes—the use of patents, trade secrets, and other proprietary rights. These data are used as approximate indicators of relative comparative advantage in the creation of industrial technology and its subsequent diffusion.
Comparable data on trade in industrial processes are available only for 2006 and 2007. These data include the combined transactions among affiliated firms (i.e., among firms that are tied to one another by ownership rights) and unaffiliated ones.
U.S. exports of industrial processes were $37 billion in 2007, 45% of total intellectual property exports; U.S. imports were $18 billion, 72% of total intangible assets imports (figure
The EU had the largest share of any economy (45%) in U.S. trade in industrial processes, followed by Japan (19%). Latin America, the Asia-9, and China had shares below 10% (figure
To foster inventiveness, nations assign property rights to inventors in the form of patents. These rights allow the inventor to exclude others from making, using, or selling the invention for a limited period in exchange for publicly disclosing details and licensing the use of the invention. Inventors obtain patents from government-authorized agencies for inventions judged to be "new…useful…and…nonobvious."
Patenting is an intermediate step toward innovation, and patent data provide indirect and partial indicators of innovation. Not all inventions are patented, and the propensity to patent differs by industry and technology area. Not all patents are of equal value; patents may be obtained to block rivals, negotiate with competitors, or help in infringement lawsuits (Cohen, Nelson, and Walsh 2000).
Indeed, the vast majority of patents are never commercialized. However, the smaller number of patents that are commercialized result in new or improved products or processes or even entirely new industries. In addition, their licensing may provide an important source of revenue, and patents may provide important information for subsequent inventions and technological advances.
This discussion focuses largely on patent activity at the U.S. Patent and Trademark Office (USPTO). It is one of the largest patent offices in the world and has a significant share of applications and grants from foreign inventors because of the size and openness of the U.S. market. These market attributes make U.S. patenting data useful for identifying trends in global inventiveness.
This section also deals with a subset of patents that their owners presume to be of sufficient economic value to warrant the high costs associated with patent filing and maintenance in three of the world's largest markets: the United States, the EU, and Japan.
Trends in Applications for USPTO Patents
Data on patent filings provide a more current look at inventiveness trends than do data on patents granted because of the long lead times. As it turns out, trends in patent applications are a reasonable proxy for later trends in patents granted.
Inventors filed 456,000 patent applications with USPTO in 2008, unchanged from 2007, but nearly double the number a decade ago (figure
Inventors residing in the United States filed 232,000 of these applications in 2008, about 9,000 less than in 2007 and the first yearly decline since 1996 (figure
Japan, the EU, and the Asia-9 are the main sources of inventors outside of the United States who file U.S. patent applications (figure
The number of patent applications from Japan and the EU grew more slowly from 1995 to 2008 than those originating elsewhere (appendix tables
USPTO patents granted among these five major world regions/countries reveal trends very similar to those observed for patent applications through 2008 (figure
USPTO Patents Granted, by Technology Area
This section discusses trends in several technology areas. The biggest—information and communications technologies—accounts for nearly 40% of all USPTO patents (figure
ICT Patenting. Patents in the largest single patent group, ICT—computers, semiconductors, and telecommunications—have risen rapidly and accounted for 65,000 (41% share) of the 158,000 patents granted in 2008, up from 22,000 (21%) in 1995 (figure
Japan ranked second in ICT patents (23% in 2008) (figure
The EU, fourth-ranked in ICT, was relatively weaker in these technologies compared with its overall share (figures
The Asia-9's share of ICT patents more than doubled, from 5% in 1995 to 13% in 2008, because of strong growth in all three technology areas (figure
Patents in Other Technology Areas. The United States has a comparatively higher-than-average share of patents in aerospace and four technology areas connected with health: pharmaceuticals, biotechnology, medical equipment, and medical electronics (figures
The EU's patents position is relatively strong in aerospace, pharmaceuticals, biotechnology, measurement and control equipment, and medical electronics (figure
As a group, the Asia-9 is relatively weaker in these technologies, as indicated by its patent shares in each technology area, which are half or less of the overall Asia-9 share; the exception is measurement and control equipment, which is near the average (7%) (figures
China's share in pharmaceuticals, biotechnology, and measurement and control equipment is the same as its overall share (figures
Patenting of Valuable Inventions: Triadic Patents
Using patent counts as an indicator of national inventive activity does not differentiate between inventions of minor and substantial economic potential. Inventions for which patent protection is sought in three of the world's largest markets—the United States, the EU, and Japan—are likely to be viewed by their owners as justifying the high costs of filing and maintaining these patents in three markets. That is, they are deemed to be substantially economically valuable.
The number of such "triadic" patents was estimated at about 51,600 in 2006 (the last year for which these data are available), up from 41,500 in 1997, and showing little growth after 2004. The United States, the EU, and Japan held basically equal shares (figure
The United States, the EU, and Japan together accounted for more than 93% of triadic patents in 1997, but that share dropped to 87% by 2006 (figure
Many of the new technologies and industries seen as critical to U.S. economic growth are also closely identified with small businesses, that is, those employing fewer than 500 people. Biotechnology, the Internet, and computer software are examples of industries built around new technologies in whose initial commercialization small businesses played an essential role.
This section covers patterns and trends that characterize small businesses operating in high-technology industries. It is based on data from the Census Bureau. Two sources of financing for high-technology small businesses are examined, using data from the National Venture Capital Association and the University of New Hampshire's Center for Venture Research.
Employment in High-Technology Small Businesses
Small firms (those with fewer than 500 employees) employed about one-third of all workers in industries classified by the Bureau of Labor Statistics (BLS) as high technology. In contrast, small firms accounted for slightly more than half of total employment in all industries in 2006 (table
In 2006, most workers in these high-technology small businesses (68%) were in the service sector (table
Small business employment in high-technology manufacturing is similarly concentrated within a relatively small number of industries: motor vehicle parts, metal working, semiconductors, other machinery, fabricated metals, and navigational and measurement tools (table
Financing of High-Technology Small Businesses
Entrepreneurs seeking to start or expand a small firm with new or unproven technology may not have access to public or credit-oriented institutional funding. Two types of financing, called angel investment and venture capital investment, are often critical to financing nascent and growing high-technology and entrepreneurial businesses. (In this section, business denotes anything from an entrepreneur with an idea to a legally established operating company.)
Angel investors tend to be wealthy individuals who invest their own funds in entrepreneurial businesses, either individually or through informal networks, usually in exchange for ownership equity. Venture capitalists manage the pooled investments of others (typically wealthy investors, investment banks, and other financial institutions) in a professionally managed fund. In return, venture capitalists receive ownership equity and almost always get to participate in managerial decisions.
Venture capital firms have categorized their investments into four broad financing stages, which are also relevant for discussion of angel investment:
Angel investor funds are concentrated in the seed-startup and early stages. During the 2007–08 period, they provided 80% of investment for these stages, compared with 20% in later stages (figure
This section examines angel and venture capital investment patterns in the United States, focusing on the period from 2001 to 2008. The section examines (1) changes in the overall level of investment, (2) investment by stage of financing, and (3) the technology areas that U.S. angel and venture capitalists find attractive.
U.S. Angel Investment. According to data from the Center for Venture Research, angel investors provided $19 billion in financing in 2008, a sharp drop from $26 billion in 2007 following 5 consecutive years of increases (figure
Although angel investors continue to concentrate on the riskiest stage of business development, they have become more conservative in their investment patterns. The share of angel funding going to seed-startup was 42% in the 2007–08 period compared with 47% in the 2002–04 period (figure
Changes in the technology areas that attract angel investment may indicate changes in the parts of the economy that offer future growth opportunities. Healthcare services received the largest share of angel investment in 2008 (16%), 5 percentage points lower than its 2006 share (figure
Businesses receiving angel investment in 2007 employed about 200,000 workers (table
U.S. Venture Capital Investment. U.S. venture capitalists invested $28.1 billion in 2008, an 8% decline compared with the level in 2007 and the first decline since 2003 (figure
Venture capitalists financed 3,300 firms in 2007, far fewer than the number of businesses financed by angel investors in the same year (57,000) (table
The number of businesses funded by venture capital and the average amount of investment have been increasing during the past several years. The number of businesses was about 3,300 in 2007–08, one-quarter higher than the average for the 2002–05 period (table
Venture capital investment has become generally more conservative than angel investment, and venture capital investments have more often been made in the later stages of business development. Capital provided for expansion and later-stage financing accounted for a combined share of 75% or more from 2002 to 2008 (figure
Venture capitalists have largely abandoned the seed-startup stage, which was 9% in the 1996–98 period, declined to 2% in the 2002–04 period, and recently recovered to a modest 5% (figure
Venture Capital Financing, by Industry. Computer software had the largest share of venture capital funding of any industry in 2007–08 (18%) but registered a 5-percentage-point decline from 1999–2001 levels (figure
Biotechnology received the second highest share of venture capital funding in 2007–08 (16%), slightly below the 2002–06 level but more than triple its share during the 1999–2001 period (figure
Industrial/energy's share more than doubled from 6% in 2005–06 to 13% in 2007–08, similar to the trend in angel investment and thought to reflect investor interest in renewable and clean energy (figure
The World Bank developed its Knowledge Economy Index (KEI) to show the potential of countries to adopt, generate, diffuse, and harness knowledge in economic development. Knowledge is regarded as an important factor of innovation, given the shift of economic activity toward KTI industries and the growing importance of intangible assets.
The KEI is a simple average of four indicator scores that measure countries' relative standing in ICT, innovation, education, and economic incentive and institutional regime. In turn, the four component indicators are composed of several variables each. Countries are ranked in order of their scores on each variable, and scores are normalized on a scale of 0 to 10 compared with all countries: The top 10% of performers get a normalized score between 9 and 10, the next decile receives normalized scores between 8 and 9, and so on.
The 2005 KEI scores of the United States, Japan, and the EU were the highest among the major regions/countries/economies, followed by those of Taiwan, Singapore, and South Korea (figure
Among the developing countries/economies, China, Taiwan, and Vietnam showed considerable improvement over the decade, albeit from very different levels (figure
Among the Asia-9, Taiwan and Vietnam showed solid increases (figure
Among other developing countries, Brazil, Croatia, and Sri Lanka showed solid gains (appendix table