The National Science Foundation published its 2008 Business R&D and Innovation Survey (BRDIS) recently to provide a map of the incidence of innovation by businesses in the USA. Interestingly, I was motivated to pull this report and read it as I had seen several sources quoting from it and bemoaning that only "9% of the estimated 1.5 million for-profit companies were active product innovators and only 9% were process innovators".
A typical comment, derived from a summary of the report's findings, is evidenced by this quote from the Washington Post's Ezra Klein. There's also a scary takeaway: "You can’t be an innovative economy if only 9% of your companies are innovating."
I think that conclusion/representation is a tad misleading.
Let's look a little more deeply. The BRDIS is produced by a joint effort of the NSF and the US Census Bureau. The survey population is 1.5 million for-profit companies, public and private, manufacturing and service sectors. Measures of innovation follow well-accepted standards described in the Oslo Manual (2005) prepared by Organization for Economic Co-operation and Development (OECD) and Eurostat. BRDIS draws on the Oslo framework.
In the Oslo framework, "innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations."
Now the data that I'd like to highlight. Pharmaceutical and biopharmaceutical companies (as well as raw material suppliers to them like SAFC) are manufacturing companies. Manufacturers represent only 8% of the 1.5 million companies in the survey. The companies above fall into the chemical sector NAICS 325 (or subsegment NAICS 3254). In contrast to the 9% figure cited in study summary for all companies, 41% of chemical companies were product innovators and 34% were process innovators.
In the non-manufacturing segment, 92% of the total companies, only 8% reported product or process innovation. However, if you look at companies that specialize in scientific R&D services NAICS 5417, these had innovation rates of 33% for products and 26% for processes.
I point this out, as again, presumably most readers of this blog are interested in the pharmaceutical industry. The industry is made up of manufacturers that work with R&D service providers/manufacturers. What's more, the BRDIS data show that there is a large difference in innovation incidence when companies with R&D activity are compared to those without any R&D activity. Companies with R&D (either performing R&D or funding others to perform R&D) exhibit far higher rates of innovation than do non-R&D companies. Sounds like a pharma company.
Only 3% of the 1.5 million companies in the survey perform or fund R&D. But of these R&D intense companies, 66% were product innovators and 51% were process innovators. There is also indication that the companies with the most R&D (those in the $50–$100 million and $100 million or more annual R&D categories) report the highest incidence of innovation: 76% and 81%, respectively, for products in 2006–08, and 69% and 71% for processes. Clearly this latter group would encompass Big Pharma for sure.
My conclusion is that things may not be as bleak as the summary stats might indicate at first glance - at least not in the pharma sector. It would be more enlightening to now compare how the US pharma sector stacks up innovation-wise versus its global counterparts in the industry. That could show a trailing gap or it could show a leadership position.
Posted by Bruce Lehr October 8th 2010.