Working Paper

Who Invests in the High-Tech Knowledge Base?

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A nation must accumulate a high-tech knowledge base to prosper.

In this paper, we provide a historical perspective on the interaction of household families, government agencies, and business enterprises, or what we call “the investment triad”, in providing a foundation for the accumulation of a high-tech knowledge base in the United States. Households and governments interact by making investments in education. Governments and businesses interact in the development of the high-tech knowledge base by investing in research and development. Businesses and households interact to invest in the knowledge base through the employment relation. The quality of these interactions in terms of complementarity and sophistication are of critical importance to the productivity performance of investments in the knowledge base. Most discussions of investing in the high-tech knowledge base focus on investments made in R&D by government and business as well as universities and non-profits. We argue that investment in R&D does not capture the productivity of R&D in generating high-quality, low cost high-tech products, nor how the revenues from those products support the higher incomes of the broad base of employees in the high-tech labor force. Over the past decade total R&D spending as a percent of GDP in the United States has remained high by historical standards, with Business-funded R&D exceeding the proportion of Government-funded R&D in the total. Yet there is a sense in the United States that over the past two to three decades the institutional arrangements for investing in the knowledge base have broken down. We hypothesize that the innovation problem resides in the interaction of the organizations – household families, government agencies, and business enterprises – in the investment triad. Using the investment-triad framework, this report provides an historical overview of the evolution of the institutional arrangements for investing in the knowledge base in the United States since the mid-19th century, culminating in an agenda for research on the contemporary operation and performance of the investment triad.