## The Innovation Paradox

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**Canonical URL:** [The Innovation Paradox](https://www.imf.org/-/media/files/publications/fandd/article/2024/09/akcigit.pdf)

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### Overview
- Despite a sustained increase in R&D investment in the United States, measured outcomes for innovation, productivity, and economic growth have weakened over recent decades.
- Aggregate increases in R&D spending obscured shifts in the allocation of inventive talent and firm behavior that appear central to the productivity slowdown.

### Key empirical findings
- Total US R&D investment increased from 2.2 percent of GDP in the 1980s to 3.4 percent of GDP today (National Science Foundation).
- Private business R&D rose from 1.1 percent of GDP to 2.5 percent of GDP over the same period.
- Productivity growth averaged 1.3 percent between 1960 and 1985; over the subsequent three and a half decades, productivity gains fell below that average and have generally been declining (with a brief uptick in the early 2000s).
- The proportion of American inventors employed by large incumbents—defined as firms more than 20 years old and employing more than 1,000 workers—rose from roughly 48 percent at the beginning of this century to 58 percent by 2015.
- Inventors who move to large firms become less innovative: their innovativeness drops by 6 percent compared with peers who join younger employers.
- After 2000, the wage premium offered by established companies widened by 20 percent relative to salaries paid by younger businesses, increasing mobility of inventors into incumbents.

### Mechanisms identified
- Reallocation of inventive talent toward large, established companies:
  - Large incumbents have absorbed a growing share of inventors, even though these firms tend to innovate less per unit of size.
- Innovation-stifling hiring:
  - Large firms hire key employees from younger competitors—often offering higher pay—but assign them roles that underutilize their innovative potential, reducing overall innovativeness.
  - This practice can function as a strategic move to neutralize competitive threats rather than to foster disruptive innovation.
- Leadership paradox:
  - As firms climb into the largest ranks of their industry, they allocate resources toward maintaining dominance (including political connections) rather than toward patent production and radical innovation.
- Policy interaction:
  - The R&D tax credit, introduced at the federal level in 1981 and adopted by Minnesota in 1982 (followed by many states), disproportionately benefits large firms: large businesses are much more likely than smaller ones to claim the credit.
  - Firms claiming R&D tax credits are more likely to engage in innovation-stifling hiring—offering higher salaries to inventors whose subsequent innovativeness declines.

### Policy implications and recommendations
- Rethink industrial policy to address allocation, not just quantity, of R&D spending:
  - Shift incentives to encourage effective reallocation of resources toward dynamic, risk-taking smaller firms and start-ups.
- Possible targeted policy tools:
  - Targeted tax credits for small businesses.
  - Grants for early-stage innovation.
  - Policies that encourage competition and reduce barriers to entry for new players.
- Objective:
  - Create a more inclusive innovation ecosystem so that R&D spending yields stronger productivity gains and broader economic growth.

### Key statistics (exact figures preserved)
- R&D investment: 2.2 percent of GDP (1980s) → 3.4 percent of GDP (today).
- Private business R&D: 1.1 percent of GDP → 2.5 percent of GDP.
- Productivity growth average: 1.3 percent (1960–1985).
- Share of inventors at large incumbents: roughly 48 percent → 58 percent (beginning of century → 2015).
- Wage premium differential after 2000: widened by 20 percent.
- Decline in inventors’ innovativeness after joining large firms: 6 percent.
- Large-incumbent definition used in the analysis: firms more than 20 years old and employing more than 1,000 workers.
- R&D tax credit introduced: 1981 (federal); Minnesota adopted state-level R&D tax credit in 1982.

*Ufuk Akcigit, “The Innovation Paradox,” F&D, September 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/09/akcigit.pdf_