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Royalty payments and the incentives to conduct research and development

Countries are introducing policies to generate stronger intellectual property rights. These policies are aimed at increasing incentives for firms to conduct research and development in the country. One form of intellectual property rights is captured by patent royalty payments—that is, payments made to the owner of a patent for the right to use that asset.

The U.S. has experienced a substantial increase in patent royalty receipts and license fees since the 2000s (blue line on left Y-axis). These data are reported in the balance of payments of the country as exports of services and reflect income that firms in the U.S. receive from other countries to use their intellectual property (e.g., patents, trademarks, copyrights, and franchises).

On top of the increase of net receipts of royalty payments from the rest of the world, there has been an increase in expenditures in research and development in the U.S. during the same period (red line on right Y-axis).

As intellectual property rights become stronger, the incentive of firms to innovate strengthens as well. Part of this research and development translates into patented innovations; along with stronger intellectual property rights, this increases royalty payments by firms in other countries that want to use this knowledge.

How this graph was created: Search for “Exports of services: Royalties and license fees” and click on the series you want to create the first line. Select “Line 1” in “Edit Lines” under the “Edit Graph” tab and add the series “Gross Domestic Product: Implicit Price Deflator” to the existing line. Apply the formula a/(b/100) to deflate exports into a constant year. Use “Add Line” within “Edit Graph” to add line 2 “Real Gross Private Domestic Investment: Fixed Investment: Nonresidential: Intellectual Property Products: Research and Development” to the existing graph. Change the time line to be “2000/01/01-2015/01/01” through the two boxes next to “Edit Graph.” Finally, under the “Format” tab, select “Right” for the “Y-Axis position” for line 2.

Suggested by Ana Maria Santacreu.

View on FRED, series used in this post: B684RC1Q027SBEA, GDPDEF, Y006RX1Q020SBEA


This is Sparta[nburg County, South Carolina]!

This is the FRED Blog’s 300th post, a great opportunity to check out Sparta. Unfortunately, FRED’s coverage does not include classical antiquity, but it has a lot of regional U.S. data, including 153 series pertaining to Spartanburg County, one of the larger counties in South Carolina, and the Spartanburg MSA. As the graph above shows, the county seems to have gone through some rough times but is rebounding now: While the population has been steadily increasing, the labor force went through two pronounced slumps and is now on the upswing. The graph below shows some other indicators for Spartanburg County, this time related to poverty. The picture there is mixed. While the number of people in poverty and the number of those receiving food stamps seem to be increasing, the proportion of people with a credit score below 660 (considered subprime) seems to be decreasing.

How these graphs were created: Search for “Sparta” or “Spartanburg,” check the series you want displayed, and click “Add to Graph.” In cases where the units mismatch and some series aren’t visible because of a large disparity, put their units on the right axis: Click “Edit Graph,” open the “Format” tab, and switch the axes.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: CBR45083SCA647NCEN, EQFXSUBPRIME045083, PEAASC45083A647NCEN, SCSPAR0LFN, SCSPAR0POP

Exorbitant privilege and the income puzzle in the U.S.

How to gain investment income despite being in debt

For most of us, the returns we gain on our assets are typically lower than the interest payments we make on debt and liabilities. This applies to most countries, too. The U.S., however, is an exception: For the U.S., liabilities with foreigners greatly surpass U.S. assets and claims on foreigners. In other words, the U.S. net international investment position is currently negative and has been for a long time. However, net income received by the U.S. is positive, which is not what we’d expect. This rather puzzling feature of the data is referred to as the U.S. income puzzle.

FRED can illustrate this puzzle for us: In the graph, the blue line tracks the U.S. net international investment position, and the red line tracks the U.S. balance on primary income (or U.S. asset earnings less liability payments). Both are shown as a percentage of annual GDP. The red line shows that, despite having a negative investment position, the U.S. still has a positive income balance. In fact, as the investment position has worsened, the income balance has actually improved.

Research on this topic has identified that the U.S. income balance remains positive primarily because returns on U.S. foreign direct investment (FDI) in other countries and on foreign financial assets that the U.S. government and residents hold far exceed returns from foreigners’ FDI in the U.S. or their holdings of U.S. assets. Why? The U.S. dollar is the world’s reserve currency, which benefits the U.S., for example, in terms of low interest payments. And foreigners hold financial reserves in the form of high-quality assets to use as a buffer in case of financial distress. By and large, these high-quality, safe assets are denominated in U.S. dollars (for example, U.S. bonds), which are in high demand and pay relatively low returns. Economists have coined a term for this benefit the U.S. enjoys: exorbitant privilege.

How this graph was created: Search for U.S. net international investment position in FRED and plot the annual series. Click on the “Edit Graph” button and add to the line annual nominal GDP and then apply the formula a/b/10. The 10 allows you to express the result as a percentage (after adjusting the units). Select the middle menu to add a line and search for the U.S. primary income balance. Add the annual data series to the graph as a new line. Repeat the exercise of dividing the series by nominal GDP.

Suggested by Maximiliano Dvorkin and Hannah Shell.

View on FRED, series used in this post: GDPA, IEABCPIA, IIPUSNETIA

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