Outsourced R&d and Gdp Growth

Abstract: In January 2011, President Obama signed into law the “America COMPETES Reauthorization Act of 2010”, whose goal was to restore US competitiveness through investment in R&D. This act reflects the belief (and corresponding economic theory) that technological progress drives economic growth. However coarse comparison between R&D and GDP growth over the past forty years indicates that scientific labor has increased 2.5 times, while GDP growth has at best remained stagnant. The leading theory to explain the disconnect holds that R&D has gotten harder. I develop and test an alternative view that firms have become worse at it. Using a novel measure, RQ, I show a 65% decline in R&D productivity. Moreover I show that much of the decline stems from increased outsourcing of R&D, which is unproductive for the funding firm. I find no evidence that R&D has gotten harder—the productivity of internal R&D is essentially unchanged. This offers hope R&D productivity and growth may be fairly easily restored by bringing outsourced R&D back inhouse. http://ssrn.com/abstract=2575977