The Imperative of Productive R&D

In 2019, the United States spent $55 billion on defense R&D. We know surprisingly little about what that funding has achieved. We have no way of measuring its productivity

A couple of weeks ago- April 22, 2021, George Mason University’s Government Contracting Center held a webinar “Measuring R&D Productivity” that sought to explore not only the concept, but how well the defense industry measured up. I found this topic particularly timely just as there are more and more questions around whether DoD is spending enough on R&D or not.

A key question I wrestle with is, “Do we need to be spending more on R&D and how would we know?” The conventional measures of R&D are all inputs — # patents, # PhDs, etc. What about outputs? What is good R&D productivity?

Ann Marie Knott who created a measure of research productivity was joined by Byron Callan of Capital Alpha Partners, a financial analyst, and Kevin Fahey former Assistant Secretary of Defense for Acquisition. We invited Anne Marie Knott to panel because the metric she created — Research Quotient — allows firms to measure their R&D productivity and compare themselves with benchmarks from within their industry sector. It’s the closest objective measure we have, at least for commercial companies. What the panel was looking to do was to explore DoD spending on R&D and whether or not more needs to be allocated, especially given the amount of spending that the tech sector has been doing.

For background, here is a quick summary of Anne Marie’s work:

Anne Marie’s RQ takes inspiration from the basic economic production function. The original economic production function is based on capital and labor. Anne Marie points to Nobel Prize winning economist Paul Romer’s work, which adds Ideas/Knowledge as a key input. According to Romers, ”ideas make material progress possible…” She took this stipulation about knowledge as an input and, being an inventor herself, looked at R&D Investment as an input and sales as an output. Specifically, she looked at sales over a 7 year period to assess a firm’s research productivity. Links at the end of this post provide further reference to RQ and her work.