NISTIR 7280 - Identifying Technology Flows and Spillovers Through NAICS Coding of ATP Project Participants

IDENTIFYING AND MEASURING SPILLOVERS

The economic analysis of ATP projects includes, as a key component, quantifying the spillover benefits to the users of the technology. To facilitate the identifica­tion of spillovers, this report documents a methodology for assigning six-digit NAICS industry codes to the own-industry and use-industry in the BRS. NAICS codes are very detailed, and a BRS survey respondent must navigate thousands of NAICS codes at the six-digit level and several hundred at the three-digit level. Also, differentiating some codes is difficult, and two different respondents could reasonably assign two different NAICS codes for the same application. Jaffe (1996) identified three types of spillovers: knowledge, market, and network, noting that the three interact synergistically to increase their combined effect. These are defined in box 2-1.

Figure 2-1 shows the source of each spillover and provides a schematic of the interaction process. According to this figure, firm 1 invests in R&D, generating new knowledge that it uses to improve its products or lower its production costs. Assum­ing that the firm successfully commercializes the results, market competition causes the value of some of firm 1's improvements to be captured by its customers in the form of lower prices or higher quality. This effect alone would cause a spillover gap equal to the customer benefit. But the figure shows other effects as well.

Figure 2-1. Private and Social Returns from R&D

The first downward-pointing arrow indicates that knowledge spillovers flow from firm 1's knowledge base to other firms through disembodied outputs such as papers and patents as well as the process of "reverse engineering" another firm's new product.¹ The second downward-pointing arrow indicates that knowledge also passes from firm 1 to other firms through research results embodied in its new commercial products and processes.

The arrow that connects other firms' knowledge with better products/lower costs, acknowledges that some of the firms benefiting from the knowledge spillovers are competitors of firm 1, which then introduce cheaper or better products into firm 1's markets—taking some of its profits and creating some additional customer benefits. Meanwhile, these other firms may also introduce improved or lower-cost products and process into their own markets, resulting in profits for them and benefits for their customers. As Jaffe observes," it is the combination of knowledge spillovers along with competitive interaction which increases the spillover gap both by raising the social return and lowering the private return" (Jaffe 1996, p. 17).

Jaffe provides a list of factors that affect the potential for market and knowledge spillovers. He also provides a list of factors that increase the likelihood of interacting market and knowledge spillovers, leading to potential network spillovers. Appendix A contains the complete list of factors identified by Jaffe.

This study provides data needed to analyze some of the factors identified by Jaffe as favorable to market and knowledge spillovers. Three of these factors are analyzed using the NAICS codes:

1. Multi-use innovation, in which many uses are likely to be commercialized by others.
   The identification of both market and knowledge spillovers is facilitated by these data since one can identify multi-use technologies in projects where commercial applications cover several different use-industries.

2. Infrastructural technology (i.e., other researchers are a significant component of the market for the new technology).
   A second factor likely to enhance spillovers is whether the technology is infrastructural. The example Jaffe gives is technology that enables other researchers to perform their jobs more efficiently and, therefore, are a significant component of the market for the new technology. These data may be used to identify projects where the use-industry is primarily focused on R&D activities; such projects may be characterized as infrastructural.
3. Technology in which licensing to others is likely to be important.
   An important source of potential market spillovers is projects where licensing occurs across multiple use-industries. For example, companies that commercialize a technology within their own-industry, but license the same technology to companies outside of their own-industry possess the potential for market spillovers.

These are some of the most apparent ways these data may be used to identify factors likely to generate spillovers. Other factors may be measured using these data, but they must be combined with other data such as those collected through the BRS. For example, NAICS codes would not be very helpful in identifying industries that have difficulty protecting their innovations. However, the BRS contains questions that specifically ask how intellectual property is used. The answers to those questions can be properly assigned to project participants' own-industry NAICS code.

There are other areas in which the NAICS coding may help to identify potential spillovers. Ruegg (1999) observed that diffusion of technology across industries was much more difficult than within their own-industries. Ruegg noted that it was not enough to accept a company's assertions that applications exist. She said that, if the potential is to be realized, there must be knowledge gained about which types of projects work best for cross-industry diffusion and what obstacles exist. NAICS data could be merged with commercial outcomes data in order to determine which projects diffused technology outside of their own-industry.

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1. By reverse engineering the new device, a company may be able to figure out how it was designed and made, and can come up with a similar, though non-IP-infringing, product.

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Date created: May 25, 2006
Last updated: June 7, 2006

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