The contribution of science and technology to production.

• Author: Adams, James
• Position: Research Summaries

Economists have long recognized that knowledge is a factor of production, and even the most important factor, given its role in labor quality and the design of capital goods. Still, it is one thing to assert a general proposition and quite another to provide confirmation of it in detail. My research is part of a larger initiative at NBER that seeks to provide this information. In essence, the work is a search for tangible evidence of flows of knowledge, specifically scientific and technical knowledge, followed by an examination of their effects on firms and other institutions. Of course private incentives, internal organization, public policy, and legal structure all affect the use of science and technology by firms, universities, and federal laboratories. Thus, broader aspects of modern economies and of modern economics govern the role of knowledge in production. These provide many opportunities for research.

The basic idea of the research is to begin by specifying a vector of stocks of past knowledge flows in the production function. The production function may specify outputs of final or intermediate goods or it may specify increments of new knowledge, such as industrial inventions or discoveries in basic science. From this root idea there flow a number of subsidiary ideas. One is the reshaping of goods production and the redirection of Research and Development (R and D) that result from the accumulation of knowledge. A second is the distinction between knowledge that is internal to an organization, and outside knowledge, or knowledge spillovers. A third theme is the importance of limitations on flows of outside knowledge or knowledge spillovers that are imposed by absorptive capacity, human and institutional constraints, and the intrinsic relevance of the information. A fourth theme is the comparable importance of basic and often academic science for production, besides that of industrial R and D. Finally, the research recognizes the role that contract design and public policy play in deliberate knowledge transfer between firms and outside R and D performers. These in turn influence the limits of the firm in R and D. In pursuing each of these themes, the design, collection, and assembly of new and high quality economic data forms a critical part of the work.

Characterizing the Contribution of Knowledge

Using data on plants owned by chemical firms that span manufacturing, I have found that firm R and D in the same product area as the plant is biased towards skilled labor, so that the skill bias of firm R and D is localized in technology space. (1) In addition, firm and industry R and D shift investment in plant capital towards equipment capital. This link should not be overlooked because equipment turns out to be skill-biased. Thus the skill bias of R and D takes place through two distinct channels, a direct one that operates through the small part of R and D that is targeted on the plant, and an indirect and potentially much larger one that operates through the accumulation of equipment capital.

The accumulation of outside knowledge, or knowledge spillovers, could alter the rate and direction of industrial R and D. Using survey data from industrial R and D laboratories as well as historical case studies, I find that outside knowledge shifts R and D effort towards learning about external research and away from internal research. (2) Similarly, in cross-equation tests I find that university R and D increases learning expenditures targeted on academia, and industrial R and D increases learning expenditures devoted to industry, but not conversely. These results are...