How Is Innovation Measured?

Why is innovation important to an economy?

Economist Ana Maria Santacreu has addressed that question in her discussions of innovation and in her research on economic growth, international trade and macroeconomics.

Economists view innovation as the main driver of productivity growth, which in turn is viewed as the main driver of economic growth, she explained in a 2017 Economic Synopses essay. (Productivity is the ratio of output per worker per unit of time.)

But how can innovation be measured? Which countries are the world leaders in innovative activity? And in the U.S., which states have the most innovation?

How Innovation Can Be Measured

Santacreu, a senior economist in the St. Louis Fed’s Research Division, described several ways that economists typically measure innovation during a 2018 Timely Topics podcast episode.

Patent Applications

One measure is the number of patent applications, which are filed within a national patent office for the exclusive rights to use an innovation, she said. 

She pointed out that the number of patent applications worldwide more than doubled from 2000 to 2015. In 2000, Japan, the U.S. and the European Union ranked first, second and third, respectively. In 2015, China accounted for the largest share of patent applications, while the U.S. ranked second and Japan third.

“However, patent applications are an imperfect measure of innovative activity, and they should be adjusted by the quality of the patent,” she said.

Two ways to make an adjustment for quality, she said, are by looking at patents granted and patent citations:

• Patents granted are the subset of patent applications that officials consider are novel enough and have an impact on society, she explained.
• Patent citations refer to the citations that a patent receives from other granted patents. More citations suggest a larger impact in spreading knowledge, she noted.

(For graphs showing patent applications vs. patent grants from 1980-2016 for several countries, see the May 2018 Economic Synopses essay by Santacreu and Heting Zhu, “What Does China’s Rise in Patents Mean? A Look at Quality vs. Quantity.”)

Research and Development Intensity

Another gauge of innovative activity that Santacreu discussed during the episode is research and development (R&D) intensity, which is measured as a share of a country’s gross domestic product (GDP) that is invested in R&D.

“While patents are a measure of the output of an innovation, R&D intensity is a measure of the efforts of [put into] an innovation,” she explained, adding that there tends to be a correlation between the two.

She noted that R&D intensity tends to be concentrated in a handful of countries, including Japan, Korea, Nordic countries and the U.S. (See a map of R&D expenditure as a percentage of GDP from the World Bank.)

Royalty Payments

Royalty payments are another measure of innovative activity that Santacreu covered. For instance, innovators receive such payments from others for the right to use their patents. Highly innovative countries tend to receive more in royalty payments, she noted, citing the U.S., Switzerland and the Nordic countries as examples.

“These are countries that have larger R&D spending and also receive large royalty income,” she said, adding, “and intellectual property rights tend to be strong in those countries that receive more in royalties.”

Innovation within the U.S.

In an April 2021 Economic Synopses essay, Santacreu and Research Associate Jesse LaBelle looked at the geographic distribution of innovation across U.S. states from 1980 to 2010.

“While the United States has become more innovative overall, not all geographic areas have contributed equally to this upward trend,” they said.

Innovation Has Shifted Westward in the U.S.

SOURCES: U.S. Patent and Trademark Office, Patent Technology Monitoring Team; Haver Analytics; and authors’ calculations. Published in “Geographic Patterns of Innovation Across U.S. States: 1980-2010,” Economic Synopses essay by Jesse LaBelle and Ana Maria Santacreu, April 5, 2021.

DESCRIPTION: Two U.S. maps show innovation has shifted west. Darker red colors indicate 2.5 to three or more patents granted per 1,000 people, the highest numbers, and appear in more areas in the 2000s map than in the 1980s map.

The authors found that innovation has become more concentrated over time and has shifted westward. In particular, the patents granted in the 2000s were largely concentrated in three regions: the Northeast, the West Coast and the Rust Belt. These geographic patterns are shown in the maps from their essay.

The states on the two coasts specialized in the computers and electronics sector, whereas the states in the Rust Belt specialized in the machinery sector, the authors pointed out. These sectors also accounted for the most patents granted, they added. (See the box for the number of patents granted in these two sectors.)

“The increase in geographic concentration and clustering of innovation suggests the presence of knowledge spillovers across U.S. states with innovation hubs, which is an important source of economic growth,” Santacreu and LaBelle said.

(For some geographic patterns for 2019, see the May 27, 2021, FRED Blog post suggested by Diego Mendez-Carbajo, “The distribution of patents across U.S. states.”)

More to Explore

• On the Economy: Globalization of Innovation and the Increase of Knowledge Sharing
• On the Economy: What Drives Productivity Differences across Countries?
• Economic Synopses: China’s Innovation and Global Technology Diffusion