IEEE Technology and Society Magazine - March 2023 - 40

Feature
How GDP is affected by innovations
To systematize the value creation of innovations,
the various mechanisms are shown in Table
1. The starting point is that a research and development
effort leads to innovation that is defined
in terms of functional improvement.4 Here, it
is assumed that the innovation would not have
emerged during a certain time period without a
specific research and development effort that enabled
the innovation.
Such an investment in innovation should evenFigure
3. Revenue for Ericsson and Intel
(BUSD) and bit rates in digital cellular
networks.
That innovators capture little of the registered
value added they generate is well established.3 For
example, according to Nordhaus [7], innovators
only earned 2.2% of the contribution to GDP generated
by their innovations, in a large study of innovations
in the United States during 1948-2001. On top
of that, however, there are worrying signs that GDP
measures capture less and less of value creation that
innovations give rise to.
If the performance increase on the order of 105 also
translated into corresponding value creation for consumers,
and inventive companies such as Ericsson or
Intel had pocketed a mere 1% of this, then the companies'
revenue should have increased by 100,000%
(see Figure 3). As shown above, there are no signs of
such gain during the relevant time period. This shows
that it is difficult for companies to realize the value of
the increased performance of their products.
Innovative products and services cannot be
decoupled from the performance of the underlying
technologies but constitute an additional functional
layer. This means that the huge increase in performance
landed in the pockets of consumers, sometimes
literally in the form of a 1990's supercomputer
in our purse or pocket.
Indirectly, the greater computing power has enabled
even faster technological advances in other
fields. For example, Figure 4 shows how the cost of
scanning a human genome has tumbled even faster
than would have been predicted by Moore's law.
3A ground-breaking study was by Griliches [8].
40
tually increase measured GDP through three channels:
1) greater value added in the innovating firm;
2) greater value added in other firms that benefit
from the innovation; and 3) increase in value added
due to follow-up innovations made possible by the
original innovation.
Yet, much of that value is not captured by official
statistical agencies. Table 2 outlines the main issues.5
Value creation beyond GDP
Beyond the issues mentioned above, economists
have been well aware of the fact that the definition
of GDP excludes huge chunks of value creation that
may have become increasingly important.
For example, consumers now have access to
a large number of apps/services that are either
free or at a low cost. There is no production cost
for these programs, only development cost, and
distribution is virtually free. To the extent that
these increase the consumer surplus, they are not
included in GDP growth. These and similar issues
are listed in Table 2.
Digitalization has changed consumption patterns,
and consumer-driven innovations have expanded
the content supply provided via the internet. E-commerce
has grown rapidly since the turn of the millennium.
It has become mobile. Digital platforms
replaced traditional intermediaries, and many established
industries were challenged.
A supply shock of digital services began with
price models characterized by a fixed cost such as a
subscription with zero marginal price, or completely
free digital services. Spotify and Netflix are a couple
of examples of the former and Facebook, YouTube,
and Google of the latter, often in exchange for
4Note that the research and development effort itself is in national accounts
sometimes treated as a cost, sometimes as an investment, and sometimes as value
added depending on the circumstances. Here, we focus on the value of the resulting
innovations.
5Several reviews of the empirical literature on these have been published that
corroborate the import of the omissions, for example, [2].
IEEE Technology and Society Magazine
IEEE Technology and Society Magazine - March 2023

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