On the measurement of real R&D: Divisia price indices for UK business enterprise R&D

This paper argues that, to measure the quantity of R&D undertaken, it is necessary to deflate R&D spending by a measure of its cost. Based on Divisia weighted averages of proxy price series, price indices are constructed for R&D spending in UK manufacturing in eight sectors and as a whole for 1970–1992. These indices are a better guide to the cost of performing R&D than the GDP deflator, which overstates the rise in real business enterprise R&D in the 1980s, although year-on-year changes are less distorted. Divisia indices are theoretically and empirically better at capturing changes in the cost of R&D than are fixed weighted indices. An investigation of the rapidly rising level of pharmaceutical R&D in the UK concludes that the rise is genuine in that it has not been driven by rapid increases in research salaries.