Innovation Comes from Small Businesses

Innovation is proven to be the growth engine for the economy. American companies are spending more on research and development (R&D) than anywhere else in the world. With innovative products and services, U.S. companies are more competitive in the global markets. More than 65,000 U.S. companies, large and small, invested over $376 billion in R&D in 2013, the latest data reported by the National Science Foundation. The R&D expenditures of U.S. companies accounted for 2.8% of their global sales, ranging from 0.1% of utilities companies to 14.4% of semiconductor machinery manufacturing companies.

Recent data also shows small U.S. manufacturing and non-manufacturing businesses employ four times more R&D personnel than large ones -- small businesses added four R&D employees, for every $10 million in sales revenue, compared to only one R&D employee in large businesses. Consequently, the share of R&D personnel is three times in small business than in large ones -- 12 out of 100 workers are R&D employees in small businesses compared to 6 out of 100 employees in large businesses.

Small businesses take risks to incubate ideas to create new products and services which benefit the U.S economy. They are a workplace for millions of innovators such as software programmers, biotechnology research scientists, semiconductor engineers, and digital artists, just to name a few. To maximize the economic and social benefits, smart and efficient policies are needed to promote small businesses and protect their innovations.

 

Nam Pham is Managing Partner at ndp | analytics, a strategic economic consulting firm.

A Changing (Clean) Energy Landscape

Energy is trending. Since January, Congress has introduced 415 bills pertaining to both energy and environmental protection policy. At the same time, government agencies have proposed 43 rules deemed economically significant of the same nature. Most recently, the Obama administration unveiled the final version of the Clean Power Plan which establish the first national standards to limit carbon pollution from power plants.

The plan is ambitious, aiming to reduce carbon emissions by 32 percent from 2005 levels by 2030. While the federal government enforces the regulation, the onus of compliance is largely borne to the state legislators and policymakers. A number of policymakers champion the act as a huge step forward in addressing climate change, others see it as overreach of government and a “War on Coal.” Either way, the rule will create winners and losers in terms of jobs and economic growth.

According to the most recent U.S. Census data, the coal industry employed nearly 80,000 workers in 2013, the vast majority of which worked in mining production. Over half of those workers are located in just two states, Kentucky and West Virginia, while the rest are spread across the country. With upcoming gubernatorial elections happening in both of these states, the topic of EPA regulation and carbon emissions is sure to be a hot-button issue for candidates on both sides of the aisle.

On the flip side of the equation, companies in the solar and wind energy industries stand to gain from these recent rules. In 2013, clean energy generation industries employed 7,000 workers across 900 establishments, according to the U.S. Census. With recent innovations in solar panel production leading to decreased costs of implementation, solar energy providers stand to grow significantly over the next decade. Wind energy is also well positioned to grow significantly. With the implementation of the Clean Power Plan, wind energy electricity generation capacity is expected to triple by 2040, according to the Energy Information Administration, resulting in job creation and economic growth due to increased manufacturing.

In a landmark regulation such as the Clean Power Plan, effects will be felt across industries, helping some and hurting others. States will have find solutions that meet compliance, but also encourage growth. Heading into an election year, the long-term viability of clean energy as well as the economic impact of new standards is shaping up to be much more than just a talking point, it will require action.

Increase Economic Growth through IP & Innovation

Last week’s Bureau of Economic Analysis (BEA) report on GDP had some good news; the advance second quarter GDP estimates reflected overall growth, with improvements in consumer spending, and an increase in exports. However, business investment, as a component of GDP, is lagging. This is where policymakers need to focus. Business investment, which includes R&D expenditures, is key to economic growth.

Washington needs to ensure protection of intellectual property in order to capitalize on investment potential and increase innovation. Innovation boosts GDP in several ways: it increases investment through R&D expenditures which impacts consumption by creating new and improved goods and services (or more efficient processes for production) and increases export opportunities by providing these new products and services globally.

National Science Foundation found that 64% of companies who invested in R&D produced ‘new or significantly improved’ products or processes; that number fell to only 12% for companies with no R&D (NSF). Moreover, we know that innovative companies value IP protections because companies who invest in R&D protect their investment through the patent system. NSF estimates that 93% of patents issued, and 92% of a patent applications filed, belong to companies who fund R&D efforts (NSF).

The value companies receive from protecting their investments is evident in their continued use of patent system. Therefore, maximizing innovation requires strong, and smart protection of IP rights. Policy makers need to support policies that maximize these protections, while deterring system abuse, in order to increase innovation and ensure economic growth.

Americans Need to Export More and Not Less

It is unclear what free trade opponents are against in the current trade debate. Is it about Trade Promotion Authority (TPA), Trans-Pacific Partnership (TPP), or something that has nothing to do with free trade? Contrary to claims that trade agreements have been big failures and disastrous to American workers and the U.S. economy, the numbers decisively tell a success story. The U.S. needs to export more and not less.

Since its first Free Trade Agreement (FTA) with Israel in 1985, the United States has implemented 14 preferential trade agreements with 20 countries located in the Americas, North Africa, the Middle East, and Asia. Nearly half of U.S. merchandise exports went to these FTA partner countries. While having more than $524 billion trade deficits in manufactured goods in 2014, the U.S. enjoyed a $55 billion trade surplus in manufactured goods with FTA partners.

We applied trade data to estimate the impacts of FTAs on U.S. exports over the past 30 years. Our analysis indicates that FTAs spurred more than $41.9 billion and 7.3% of U.S. manufacturing exports to FTA partners. As expected, our analysis shows that Americans export intellectual property (IP)-intensive products such as pharmaceuticals, computer and electronic products, transportation equipment, chemical products, and medical devices; all areas where Americans have comparative advantages in the global markets. We also found that FTAs spurred over $34.2 billion in exports from IP-intensive industries, or 10.9% of IP-intensive exports. In comparison, exports of non-IP-intensive industries grew by approximately $7.7 billion, or 3.0% of U.S. exports, to those FTA partner countries.

By reducing and eliminating tariffs and non-tariff barriers, trade agreements have boosted exports which consequently raised outputs, employment, and wages in the exporting countries. Our analysis show that IP-intensive manufacturing industries added more jobs during the most recent economic recovery period while non-IP-intensive manufacturing industries cut more jobs during the economic downturn. While IP-intensive manufacturing industries employ nearly 30% of American manufacturing workers, they account for nearly 50% of gross output (total sales) of manufacturing industries. IP-intensive manufacturing industries pay 50% higher wages than non-IP-intensive manufacturing industries (approximately $60,000 compared to $40,000 per employee annually).

All in all, the numbers are favorable for U.S. trade agreements. Although U.S. exports have increased substantially in the past 30 years since its first trade agreement with Israel, the share of U.S. merchandise exports has declined from 11.2% to 8.6% of world exports as world exports have increased more than ten times. With the rapid increase in global economic integration, it makes perfect sense that American leaders are in search for FTA partners.

3 Reasons 2015 Will Be A Big Year For Global Trade

2015 is shaping up to be a big year for the global economy. The U.S.-led free trade agreements have new life. The U.S. and China reached a monumental agreement on information and communications technology tariffs. And India and the U.S. came to consensus on food stockpiles that helps bring the World Trade Organization’s Trade Facilitation Agreement (TFA) one step closer to reality. The U.S. cannot squander this opportunity.

Photo courtesy of Reuters.
  1. On the U.S. FTAs: The Trans-Pacific Partnership (TTIP) and Trans-Atlantic Trade and Investment Partnership (TTIP) have returned to the conversation among policymakers as something the President and Congress can accomplish during the lame-duck session. The success of these agreements hinges on the President and Congress re-enacting the Trade Promotion Authority to allow negotiated trade deals to be voted on in Congress without having them picked apart. And, as we noted in our previous report, there are substantial benefits to TPP countries due to intellectual property-intensive industries that are vital to prosperity, innovation, and competitiveness of all countries in the TPP. 
  2. On U.S./China ITA: The U.S. and China finally agreed to adopt an updated Information Technology Agreement (ITA) that eliminates tariffs on trade for hundreds of information and communications technology (ITC) products. These tariff eliminations, which stood at a range from 8 percent for medical devices to 30 percent for video game consoles, are massively important for the U.S. economy and consumers. The ITA expansion is estimated to increase U.S. exports by $2.8 billion, advance revenues of U.S. companies by $10 billion, and create 60,000 new jobs. Overall, the agreement stands to increase global GDP $190 billion annually. 
  3. On the WTO’s TFA: The U.S. and India reached an agreement over food stockpiles that pulls the Group of 20 major economies closer to consensus on the Bali Agreement. The agreement would be the biggest trade deal in the WTO since its inception. The TFA will remove delays at border crossing and ports by bringing uniform standards at customs and ports. The WTO estimates TFA will stimulate the global economy by $1 trillion. 

The opening of global markets beyond the incremental steps taken over the past few years is a great thing for a sputtering global economy. Businesses benefit by having access to many more customers. Consumers gain access to goods and products are lower prices and a greater variety. Washington has a grand opportunity to lead on global trade. It better not spoil it.

Data-Driven Advocacy

Data and research are fundamental to advocacy. Data-driven advocacy is what we do best at ndp | analytics. Below is an interview featuring our managing partner, Dr. Nam Pham, with CQ Roll Call's Connectivity, in partnership with Goddard Gunster, to discuss the importance of economic research to advocacy and public affairs.

CQ: Why are impact studies important for advocacy?

NP: Well-managed advocacy efforts are evidenced-based and driven by credible data and simple facts. If one cannot explain why a policy issue matters with supporting data, it is difficult to convince the audiences why the issue matters.  In public policy, any decision produces economic benefits as well as costs in the short- and long-term. Data and statistics help proving the position.

CQ: How do impact studies for advocacy differ from academic studies?

NP: Advocacy studies differ in that they typically combine user-friendly text, graphs, and tables to communicate the position effectively to broader audiences including policymakers, business leaders, the media, and the public.  In advocacy studies, the writing should be written in plain language and free of economic and academic jargon and mathematical equations. Our typical economic report states the issue, provides facts to support the position, and explains the meaning of the numbers that lead the conclusions in a one-minute summary, a 3-minute summary, a 15- to 20-page report, and an infographic to catch the eye of general audiences.

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CQ: Where does the information come from?

NP: Our impact reports use official data, third-party commercial databases, and industry publications that are available for everyone. It is important to document the data sources so that anyone can replicate the analyses to derive the same conclusions. In some cases when data are not available, we create original datasets by interviewing, interpolating, and estimating. In those cases, we carefully describe our methodology and steps to derive the data.

CQ: What are some of the pitfalls to watch for when undertaking a research study on behalf of your customer?

NP: It’s important to ensure that the argument is supported by the existing data. Our methodologies and analytical framework are straightforward. We don’t create convoluted “black-box” economic models.  If the arguments cannot be supported by the official data, the credibility of the analysis is nonexistent. Furthermore, our reports are written to be readily accessible to policymakers and their staff, the media, and the general audiences.

New Report: The Essential Role of the USPS in American Daily Life

Everyone loves getting mail. Birthday cards from your grandparents, packages from favorite online retailers, life updates from dear friends, and birthday gifts from your family. Email, mobile phones, and social media have altered the way we communicate, but they are still no substitute for a handwritten thank you note sent through the mail. Despite the opinions of a few people in Congress and the White House, the Postal Service is still an extremely valuable service and an integral part of American daily life. 

Our latest report evaluates the valuable role of the United States Postal Service (USPS) to the U.S. economy, consumers, and the mail services industry. The USPS, established by the U.S. Constitution, has served the American public and its businesses for more than 200 years. The USPS is the foundation of the U.S. mailing industry and many other industries that rely on the existing USPS infrastructure to deliver their products to final destinations. 

In the last decade, the mailing services industry has entered a new era. The applications of the Internet through e-commerce businesses produce both positive and negative impacts on the mail services industry. While networked solutions have reduced the need to mail bill payments, checks, and tax payments, online shopping and auctions create an exponential demand for cheap and fast delivery. In fact, e-commerce businesses are working with the USPS, UPS, and FedEx to deliver mail and packages at lower costs and even on Sundays.

The USPS is the foundation of the U.S. mail services industry and many other industries that rely on the infrastructure to deliver their products to final destinations. In fact, the U.S. mail services industry has become highly interdependent. Both FedEx and UPS rely heavily on the USPS infrastructure for final delivery of small packages in urban and rural areas. The USPS infrastructure has been created, maintained, and expanded over the past decades to a level that no other business entity can provide. The USPS raised the cost of mailing and is proposing to cut back services. While the industry and consumers need solutions for cheaper and faster deliveries, raising prices and cutting services are counter-productive and are against the market demand. 

The USPS relies on its economies of scale and scope to create different mail segments. The current proposal of eliminating Saturday delivery would be counter-productive and ineffective. Since these mail segments share the infrastructure such as vehicles and postal carriers, the cost savings would be insignificant. The volume of mail and packages would still need to be delivered on the following days. As a result, the associated costs would still be spent and the USPS may need to hire and train additional part-time workers to handle the bottlenecks and delays in the following days. The adverse effects would be more significant when the USPS fails to satisfy their customers’ expectations and the demand for services.