Amar Bhidé argues in a recent op ed that making the R & D tax credit permanent will “not encourage the broad-based innovation that is crucial for widespread prosperity,” and he is skeptical of the idea – which has been around since the credit was first instituted, on a temporary basis, in 1981, and which has been one of the arguments advanced by the Clinton, Bush, and now the Obama administration for making the credit permanent — that there is significant “spillover” or “public benefit” from private investment in research. While his skepticism seems warranted, the question whether corporate investment in “research” can produce “higher returns for society” really turns on how we think about research, innovation and technology, and how we address the broader, unsettled question of the proper role of business in society.
“Research and experimentation” has been a murky area, even after reforms were made to correct abuses of the original 1981 statute, which yielded such triumphs of “research” as Chicken McNuggets or different flavors of soda pop, and creative accounting that wrote off failed ventures as “experiments.” In the 1986 reforms, Congress developed a test – a statement of what qualified as research — to clarify the law on this point. As Robert S. McIntyre noted in a 2002 piece on the credit and its abuses:
The IRS eventually interpreted this “public benefit” or “discovery” test to require that qualifying research must be directed at “obtaining knowledge that exceeds, expands, or refines the common knowledge of skilled professionals in a particular field of science or engineering.” In other words, if everybody already knows what a “research” project is intended to “discover,” then the government won’t foolishly subsidize it with a tax credit.
This excess, expansion, or refinement of “knowledge” – something that goes beyond what “skilled professionals” in “a particular field of science and engineering” already know, or can anticipate or intend – is where the law tells us to look for the public benefits of corporate R & D. True innovation lies in unexpected outcomes. And businesses should be rewarded for advancing technical knowledge, or at least given an incentive to do so, because the advancement of technical knowledge will bring economic prosperity and other benefits.
There are lots of assumptions being made here about the way things work, and it’s not at all clear that things really do – still — work this way. Much of the thinking here and business, society and technology goes back to the post-war era. There are, for instance, connections to the theories of economist Robert Solow about the role of technical progress in growth of industrialized countries. Solow observed that technological advancement is the key force in economic growth – the “residual” after all conventional inputs, including capital and labor, are accounted for. It seems reasonable to conclude from his observation that if we encourage capital-rich companies to invest more in R & D, technological advancement will propel the economy forward — while at the same time delivering new “knowledge” and new “discoveries” (and, the Obama administration hopes, new jobs).
It is no discredit to Solow to say that his thinking exemplified and helped fuel the technological optimism of the postwar period. He famously calculated that four-fifths of the growth in US output per worker could be attributed to technical advances. Now, certain technical advances have led to a decline in US productivity, or threaten US workers with obsolescence. This is just a small instance of the way in which our experience challenges our faith in technology.
Belief in the “residual” power of technology to fuel economic growth and materially benefit society has survived well beyond the industrialized national economies Solow studied for a number of reasons. Corporations do not simply – or cynically — want to encourage the belief that tax breaks they receive will somehow benefit the larger society; corporations, too, are creatures of technology and wholly captive to technological optimism. More broadly, the notion that technology can deliver economic as well as social benefits is still something Americans believe, or want to believe, despite lots of evidence to the contrary. We’ve staked our whole way of life on the idea.
Of course, Bhidé doesn’t go this far. Instead, he argues, we need a more “inclusive” view of innovation – one that takes into account “innovations in design, marketing, logistics and organization” – if we are to get beyond the narrow (and, to his mind, mistaken) view that increased R & D spending is going to correct market failures or produce beneficial outcomes.
But that broader view is not something we should expect scientists and engineers, or lawmakers and the IRS, to deliver. Nor is it a subject on which we should simply defer to professors of business or economists — who will never settle the matter anyway. Part of the trouble, in my view, is not simply with the idea of innovation. It’s with the idea of “research” as something that produces only scientific and technical knowledge, or as an activity to be undertaken solely by scientists and engineers (aided and abetted, perhaps, by economists and professors of business administration).
It seems to me that if we are going to provide incentives for research, we can try to do better than hope for spillovers or accidental benefits from the lab-work of scientists and engineers. Why not broaden the scope of the research we encourage and underwrite with tax credits to include other kinds of research that might benefit the public? What would the corporate R & D picture look like then? How might organizations capture research into the human condition or the social world, and develop its discoveries and perspectives to improve their own performance, or obtain a truer and more complete picture of the world? How would their performance measures change, along with measures of prosperity, or real wealth?
You have to wonder why these considerations don’t really have a place in the conversation, and even seem out of bounds, far-fetched. It’s worth remembering, in this context, that to “credit” something is to put stock in it, believe in it, lend it credence. Are we now so captive to the story of scientific and technical progress that we think other forms of research could never benefit the public or contribute to the common wealth?
This much is clear. Scientific research unchecked by critical judgment, historical perspective, the broad study of culture and society, or meaningful public debate, is bound to lack human scale and a vital connection to the very “public” it is supposed to benefit. And the study of the choices we make, or how we make them, or what it is like to live in this moment, at this particular time and in this particular place, is bound to yield some richer understanding of what it will take to make the right choices tomorrow.