Firm IQ: A Universal, Uniform and Reliable Measure of R&D Effectiveness

Washington University, Saint Louis MO

Investigators

Abstract

Despite the dramatic impact of R&D on firm and economic growth, there currently are no good measures of R&D effectiveness at the firm level. The most prevalent measure, patent counts, suffers from problems of universality (less than 50% of firms conducting R&D have any patents), uniformity (10% of U.S patents account for 81-85% of the economic value of all US patents) and reliability (patents are a poor predictor of firm market value). Without a good measure of effectiveness, it is difficult to characterize the impact of R&D investment, to understand the mechanisms through which R&D investments generate economic outcomes, or to generate tools guiding future investment. What firms, policy makers and academics need is a universal, uniform and reliable measure of R&D effectiveness. That measure should match constructs in economic theory (so academics can test them) and should provide guidance to firms and policy-makers about the choice of investment levels. Intellectual Merit: Recent empirical methods have facilitated a new measure of R&D effectiveness using firm accounting data that is based in economic theory. This measure has the potential of predicting both firms' behavior and their market value. The measure is called IQ because it captures firms' technical problem solving capability in much the same way individual IQ captures analytical problem solving capability: those with higher IQ solve more problems per unit of input (dollars for firms, minutes for individuals) than those with lower IQ. Perhaps most importantly, firm IQ (unlike individual IQ) appears to be mutable over long periods of time. Accordingly, understanding the organizational structures and processes driving differences in IQ offers the potential for firms to improve their R&D effectiveness. Work to date has estimated the IQ for publicly-traded US firms, characterized variation of IQ across industries, and identified high and low IQ firms within each industry. This pilot study represents the first stage in an effort to characterize the organizational configurations and processes driving IQ. The pilot comprises in-depth interviews with paired firms (one high IQ, one low IQ) in two industries. These interviews form the basis of rich case studies of the four firms, as well as identify candidate factors/organizational configurations to examine in a future quantitative study across the full spectrum of firms engaged in R&D. Broader Impact: There are both immediate and long term benefits from this study. The immediate benefits of the IQ measure are 1) academics' use of the measure to resolve empirical anomalies in prior studies, 2) firms' use of the measure to compute their optimal R&D investment, and 3) policymakers' use of the measure to allocate funds based on firmer evidence. The longer term benefit from the full study (to be disseminated via conference presentations, journal articles and ultimately a book for practitioners) is advancing understanding about the effectiveness of R&D investments.