Innovation & Competitiveness

I read this bit from Derek Lowe's In The Pipeline blog and I see trouble brewing:

They [author's of an industry study] calculate that the return on investment (ROI) from small-molecule drug research was nearly 12% during the late 1990s, but since 2001 it's been more like 7.5%. If true, that's not a very nice number at all, because their data indicate that most companies assume a capitalization rate of between 8.5 and 11% - in other words, internal industry estimates of what it costs to develop a drug over time now run higher, on average, than the actual returns from developing one.

My understanding is that productivity usually rises toward the end of a recession. Partly this is just the re-introduction of workers to existing production facilities so you get an automatic bump up in "productivity" figures. But, also, my understanding is that during a business cycle, the recessionary low stimulates a lot of inventiveness. I guess people have a lot of free time on their hands or the distress around them motivates their sense that something needs to be done or that there is a better way, so you get more inventions in the pipeline.

But Lowe is saying that big pharma isn't showing a surge in inventiveness. That's a bad sign.

I wonder how much this is a doldrum created by bureaucracy. Government has layered on a lot of testing costs to get new drug approval. (I remember how AIDS activists went ballistic as people were dying and willing to try any crazy "cure" in the hopes that something would be found. But despite the fact that they were dying, the government wouldn't let them sign up for radical new drug trials because of "safety concerns".) I don't have any facts at hand, but my understanding is that productivity rises during wartime. My guess is that desperation causes governments to drop a lot of the paperwork and encourage innovative ideas.

So Obama has a health care problem, but the drug industry has an "invention" problem. How do you fix that?

As for Canada... I get depressed. The level of productivity increases in Canada continues to trail that of the US by a large amount. That is very bad for the future wealth of Canada. It isn't clear to me how to "fix" this problem. Some would argue that low productivity is an artifact of a social democratic government that lowers the rewards of private enterprise. Others would argue that Canada is to a large extent a "branch plant" economy and very much dependent of corporate decisions in the US which view productivity investments in Canada as an afterthought. I don't know, but it worries me. From a Canadian study:

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What I do know... human ingenuity is limitless. As a society we need to figure out a system that unleashes inventiveness and risk taking. We have seen how the joint stock company helped move the world from individual entrepreneur industries with a limited size and lifetime to the era of multinational corporations. What invention is needed to unleash invention, risk taking, and productivity?