WhitePaper | Theory and Methodology behind inventionINDEX

Authors: Rogers, Adam A, Smyth, Damian,J*

Principals, Swanson Reed – Specialist R&D Tax Advisors

Strategic Overview

The trajectory of the United States’ innovation economy stands at a critical juncture in the mid-2020s. Following the disruptive shock of the COVID-19 pandemic, the fundamental relationships between capital investment, intellectual property creation, and economic expansion have undergone significant structural realignments. This paper provides an exhaustive examination of the current state of U.S. innovation, utilizing the proprietary methodology of the Swanson Reed inventionINDEX as a primary lens for analysis.

The inventionINDEX was developed to solve this question: How do you differentiate between an economy that is growing because it is just adding more people and/or capital (extensive growth) and an economy that is growing because it is inventing new ways to create value (intensive growth)?

Unlike static rankings that tally the number of patents or the total dollars spent on R&D, the inventionINDEX is a dynamic measure of elasticity. It asks a fundamental question: For every percentage point of GDP growth, how much new intellectual property is being generated? This ratio serves as a proxy for the economy’s “future-proofing.” A high index suggests that economic gains are being reinvested into the creation of new assets (patents) that will yield returns over the next 20 years. A low index suggests that the economy is consuming its existing stock of ideas without replenishing them, a state of fragility that leaves it vulnerable to external shocks.

Central to this investigation is the rigorous evaluation of the 20-year baseline calculation—a temporal framework essential for distinguishing secular innovation trends from transient economic noise. By anchoring innovation metrics to the statutory lifespan of utility patents, analysts can derive a more accurate assessment of a jurisdiction’s long-term inventive health.

The paper contrasts the innovation landscape of the pre-pandemic era (2015–2019) with the volatile post-COVID recovery period (2020–2025), revealing a concerning “consolidation phase” characterized by declining patent applications and uneven regional performance. Furthermore, we benchmark the inventionINDEX against established metrics such as the World Intellectual Property Organization’s (WIPO) Global Innovation Index (GII) and the Bloomberg Innovation Index, arguing that Swanson Reed’s focus on the elasticity of patent production relative to GDP offers superior utility for agile policy formulation.

Finally, the paper posits a strategic justification for the intervention of private-sector advocacy—specifically the Patent Funding Initiative and related lobbying efforts—as a necessary mechanism to bridge the “Valley of Death” for states consistently underperforming against their innovation benchmarks.

The Theoretical Foundations of Innovation Measurement

The Challenge of the Intangible Economy

In the contemporary global economy, the production of intangible assets—specifically intellectual property (IP) protected by patents—has superseded physical manufacturing as the primary driver of long-term wealth creation. However, measuring “innovation” remains a notoriously elusive challenge. Traditional macroeconomic metrics, primarily Gross Domestic Product (GDP), were designed for an industrial age where output could be measured in tons of steel or bushels of wheat. In the information age, where value is generated through algorithms, gene therapies, and novel chemical compounds, these traditional metrics often fail to capture the underlying health of the economy’s creative engine.

The core problem lies in the disconnect between expenditure and result. Standard metrics often rely on inputs, such as aggregate Research and Development (R&D) spending, as a proxy for innovation. While R&D spending indicates intent, it does not guarantee success. A region may spend billions on research that yields no commercializable intellectual property, resulting in economic inefficiency. Conversely, metrics that aggregate disparate indicators—ranging from the number of PhD graduates to broadband penetration rates—often produce composite scores that obscure the immediate, tangible output of the innovation ecosystem.

The aftermath of the COVID-19 pandemic has further complicated this measurement landscape. The rapid digital transformation necessitated by global lockdowns, combined with supply chain ruptures and subsequent inflationary pressures, has created a noisy economic environment. In this context, standard indicators often fail to signal underlying structural weaknesses or differentiate between a temporary productivity spike driven by remote work adoption and genuine, sustainable technological progress.

The inventionINDEX as a Solution

This paper centers on the inventionINDEX, a metric developed by Swanson Reed, which addresses these measurement deficiencies by evaluating innovation output through a specific ratio: GDP growth versus patent production growth. This “efficiency ratio” or “innovation elasticity” provides a sentiment grade (A through F) that serves as a leading indicator for economic recovery. By focusing on the relationship between economic expansion and intellectual property generation, the inventionINDEX isolates the quality of growth.

If a state’s GDP expands significantly while its patent production remains stagnant or declines, the index suggests that the growth is likely driven by consumption, population influx, or asset inflation—factors that are often cyclical and vulnerable to correction. Conversely, if patent production growth outpaces GDP growth, it indicates that the economy is deepening its intellectual capital base, laying the foundation for high-value industries and long-term resilience. This methodology transforms innovation measurement from a static ranking of “inputs” into a dynamic assessment of economic “metabolism”.

The 20-Year Baseline: Anatomy of a Critical Metric

The user’s query explicitly highlights the importance of the 20-year baseline calculation. Understanding why this specific temporal horizon is chosen is fundamental to grasping the mechanics of valid innovation indexing. It is not an arbitrary statistical window; rather, it is deeply rooted in the legal, economic, and lifecycle realities of intellectual property.

The Statutory Foundation: Alignment with Patent Lifecycles

The most direct and irrefutable justification for a 20-year baseline is the statutory term of a U.S. utility patent. Under 35 U.S.C. 154(a)(2), a patent confers upon its owner the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States for a period of 20 years from the date of filing the application.

This 20-year cycle defines the “monopoly period” during which an invention generates supranormal economic returns for the holder. This exclusivity is the fundamental economic incentive provided by the government to encourage the initial investment in R&D, which is often high-risk and capital-intensive. Consequently, any index measuring the economic impact of patents must account for this complete lifecycle to be accurate.

The Replacement Rate Concept

A healthy innovation ecosystem operates much like a demographic population; it must replace its expiring assets at a rate that exceeds their expiration. Patents filed 20 years ago are currently entering the public domain. When a patent expires, the barrier to entry for competitors vanishes, prices typically drop, and the profit margins for the original innovator compress. This process, while beneficial for consumers, removes the “rent-seeking” capability of the original IP asset.

Therefore, the 20-year baseline serves as the “replacement rate” calculation. If a state’s current patent production growth lags behind the rate of patents filed 20 years prior (which are now expiring), the region is effectively suffering from “intellectual capital depreciation.” The inventionINDEX uses this baseline to determine if a state is growing its stock of protected knowledge or merely consuming the legacy of past innovation.

Economic Cycles and Structural Smoothing

Innovation does not occur in a linear vacuum; it is subject to macroeconomic cycles. A 20-year baseline captures multiple business cycles, typically spanning two to three full expansions and contractions (often referred to as Juglar cycles) or a significant portion of a long-wave technological cycle (Kondratiev wave).

Filtering Cyclical Noise

Short-term metrics, such as those relying on 1-year to 5-year baselines, are heavily influenced by immediate economic conditions and shocks. For instance, the surge in productivity and digital patenting observed in 2020–2021 was a reactive anomaly driven by the pandemic shock. During this period, companies rushed to patent remote work technologies and digital delivery mechanisms. A metric based solely on a 5-year baseline might interpret a subsequent decline in 2025 as a catastrophic failure, whereas a 20-year baseline would contextually recognize it as a normalization following an exogenous shock.

Identifying Technological Waves

Historical data demonstrates that technological drivers shift over decades. The drivers of the U.S. innovation index have evolved from electricity and chemicals in the 1920s to computers, communications, and biotechnology in the post-1980s era. A 20-year baseline provides the necessary historical context to identify when a region is transitioning from one dominant technological paradigm to another.

For example, a state heavily reliant on internal combustion engine patents might see a decline in filings as the industry matures. Without a 20-year view, this might simply look like economic failure. However, with the long-term baseline, analysts can determine if this decline is being offset by a rise in new sectors, such as renewable energy or battery technology, or if the region is failing to make the transition—a phenomenon often described as the “Rust Belt” effect in IP.

Benchmarking Against Regulatory and Administrative Lag

The patent system itself introduces significant administrative lag that can distort short-term data. The average pendency for a patent application at the USPTO—the time between filing and grant—can range from 20 to 30 months, with complex technologies often taking much longer. Furthermore, delays can be exacerbated by external factors, such as the operational disruptions at the USPTO during the COVID-19 pandemic, which created backlogs in application processing.

If an innovation index relied on a short-term baseline (e.g., 3 years), a bureaucratic bottleneck at the USPTO could be misinterpreted as a decline in innovation intent or R&D activity. By utilizing a 20-year baseline, the inventionINDEX methodology can normalize for these periods of administrative delay. It focuses on the long-term propensity of the economy to generate novel ideas regardless of temporary fluctuations in bureaucratic throughput. This allows for a more accurate assessment of the inventive capacity of the region rather than the processing capacity of the patent office.

The Baseline as a Predictive Tool for Economic Recovery

Swanson Reed’s methodology explicitly claims the ability to “predict which states have the best chance to recover economically from the pandemic”. This predictive power is derived largely from the analysis of baseline deviation.

Mean Reversion and Resilience

Economic theory suggests that growth rates tend to revert to the mean over the long run. If a state’s current innovation output (Patent Production relative to GDP) significantly exceeds its 20-year baseline (Positive Deviation), it suggests a robust, self-sustaining ecosystem that has built up “excess capacity” for growth. This excess capacity acts as a buffer against economic shocks. Companies with strong IP portfolios can pivot to new markets, license their technology for revenue, or defend their market share more effectively during downturns.

Structural Deficits and Fragility

Conversely, a state consistently operating below its 20-year baseline (Negative Deviation) is structurally fragile. Such a state has lost the “muscle memory” of innovation. It lacks the pipeline of new products necessary to drive future growth and is likely relying on legacy industries that are slowly becoming obsolete. When an economic shock like the pandemic hits, these states lack the adaptability to recover quickly because they do not have the “next generation” of products ready to launch. The inventionINDEX quantifies this fragility, providing a clear warning signal to policymakers.

Table 1: Strategic Implications of the 20-Year Baseline

The Chronology of Disruption: Pre- and Post-COVID Innovation Dynamics

To understand the current readings of the inventionINDEX—which showed a “consolidation phase” in late 2025 —we must contextualize the data against the starkly different landscapes of the pre-pandemic and post-pandemic United States. The pandemic acted as a massive accelerant for some trends while simultaneously acting as a brake on others, creating a complex, non-linear recovery path.

The Pre-COVID Era (2015–2019): The “Optimized Efficiency” Phase

Prior to 2020, the U.S. innovation engine was characterized by steady, predictable growth and a focus on software, consumer electronics, and nascent AI technologies.

• Stability of R&D Investment: R&D spending grew at a consistent average of 7.3% annually between 2015 and 2019. The corporate tax environment was highly favorable for innovation. Specifically, the ability to immediately expense R&D costs under Section 174 of the Internal Revenue Code encouraged companies to reinvest profits directly into research without tax penalty.
• Global Integration: Supply chains were globally optimized, and cross-border collaboration was high. The U.S. consistently led in patent filings, though China was rapidly closing the gap in volume. The ecosystem was defined by “Just-in-Time” efficiency, where R&D was tightly coupled with immediate market needs.
• Patent Activity: Filings increased year-over-year, driven by the “Big Tech” cohorts (Google, Apple, Microsoft, IBM). IBM, for instance, maintained a decades-long streak as the top patent recipient, signaling a strategy of aggressive portfolio defense and licensing revenue generation.

Characteristic of the Era: Innovation was “efficient”—focused on incremental improvements, software-as-a-service (SaaS) models, and consumer applications. The inventionINDEX during this period would likely have shown steady “B” to “A” grades for tech-heavy states like California and Massachusetts, reflecting a strong correlation between GDP growth and patent output.

The Pandemic Shock (2020–2022): Disruption and Divergence

The onset of COVID-19 in early 2020 triggered a massive, asymmetric shock to the innovation ecosystem.

• The “Necessity Innovation” Surge: While sectors like travel, automotive, and aerospace saw R&D collapses, the pharmaceutical and Information and Communications Technology (ICT) sectors exploded. The “warp speed” development of mRNA vaccines demonstrated that the U.S. could innovate at unprecedented velocity when regulatory barriers were lowered and funding was unlimited. This period saw a redirection of innovation resources toward immediate survival and adaptation mechanisms.
• Productivity Spikes: U.S. labor productivity surged in 2020 due to the rapid adoption of remote work technologies and the shedding of low-productivity service jobs. This created a temporary “false positive” in innovation efficiency metrics. While GDP contracted due to lockdowns, high-tech output remained robust or even grew. This divergence potentially inflated inventionINDEX scores in tech-centric hubs, masking the underlying economic distress in the broader economy.
• The “Valley of Death” Widens: While large technology companies thrived, the startup ecosystem faced a capital crunch. Venture capital initially paused, then poured exclusively into late-stage “pandemic winners” (e.g., Zoom, Peloton, Moderna), leaving early-stage deep tech vulnerable. This sowed the seeds for the pipeline gaps observed in the later post-COVID years.

The Post-COVID Landscape (2023–2025): Consolidation and Cooling

By late 2025, the data paints a picture of an innovation economy in transition. The “sugar rush” of pandemic stimulus has faded, and structural headwinds have emerged.

• Decline in Patent Applications: After seven years of growth, U.S. patent applications dropped 9% in 2025, reaching the lowest level since 2019. This is a critical warning sign. It suggests that the R&D performed during the pandemic (2020-2022) did not translate into the same volume of patentable outputs as expected, or that companies are shifting strategies toward trade secrets due to cost pressures or legal uncertainties.
• Shift in Corporate Strategy: IBM falling to 11th place in patent rankings signals a major shift from “volume patenting” to “quality patenting” or open innovation. This depresses the raw numbers used in indices but may not necessarily indicate a drop in the economic value of the IP being generated. However, for an index based on volume growth, it registers as a negative signal.
• Regulatory Headwinds – The Section 174 Impact: A major, often overlooked factor in the post-COVID landscape is the change to Section 174 of the tax code. Effective in 2022, companies were no longer allowed to immediately deduct R&D expenses; instead, they must amortize them over 5 years (15 years for foreign research). This effectively increased the cost of innovation, reducing the cash flow available for patenting. This policy change acts as a significant “brake” on the innovation economy, contributing to the decline in filings observed in 2025.

Regional Divergence and the “K-Shaped” Innovation Recovery

The inventionINDEX reveals that the recovery has been highly uneven across the United States.

• Winners (Sun Belt Migration): Florida (July 2025 Score: 5.22%, Grade A+) and North Carolina (Nov 2025 Score: 1.83%, Grade A+) have consistently outperformed their historical baselines. These states likely benefited from the migration of talent (“brain drain” from traditional hubs) during the remote work era, as well as the growth of robust biotech and fintech clusters that are less sensitive to manufacturing supply chain disruptions.
• Strugglers (Legacy Hubs): Connecticut (Dec 2025 Score: 0.99%, Grade C-) and Washington (Dec 2025 Score: 1.36%, Grade B-) show signs of stagnation. Washington’s “B-” is surprisingly low for a major tech hub (home to Microsoft and Amazon), potentially reflecting the saturation of the software patent market, significant layoffs in the tech sector during 2023-2024, or a maturity phase where GDP growth (driven by cloud services revenue) outpaces the growth of new patent filings.
• The “Consolidation Phase”: The November 2025 Federal inventionINDEX score of 1.37% (B-) represents a “marginal improvement” but remains “significantly lower than the highs observed earlier in the five-year cycle” (e.g., 2.31% in Oct 2023). This suggests the U.S. economy is “digesting” the massive investments of the prior years and facing a higher cost of capital (interest rates), which suppresses speculative, long-horizon R&D.

Table 2: Pre- vs. Post-COVID Innovation Metrics Comparison

The Swanson Reed inventionINDEX Methodology & Benchmarking

The inventionINDEX distinguishes itself from other metrics through its specific methodological focus on the elasticity of innovation rather than the absolute magnitude of inputs.

Methodology Deconstruction

The core formula of the index is defined as a function of the comparative growth rates of GDP and Patent Production:

Numerator/Denominator Dynamics

While the exact proprietary algorithm is not fully disclosed, the descriptions imply a comparative ratio. It measures whether patent production is growing faster or slower than the general economy.

• The “Efficiency” Signal: If GDP grows by 3% but patent production grows by 0%, the economy is expanding through existing means (scaling current tech, population growth, service expansion) rather than creating new value capabilities. This is “extensive growth.”
• The “Intensive” Signal: Conversely, if Patent Production grows by 5% while GDP grows by 2%, the economy is building “intensive growth” capacity—stockpiling the intellectual capital that will monetize in the future.

The “Sentiment” Grading Scale

The index converts these raw data points into a consumer-friendly “Sentiment Grade” (A-F) :

• A / A+ (> 2.00%): Innovation is outpacing economic growth. The economy is becoming more knowledge-intensive. (e.g., Florida at 5.22% ).
• B / B- (1.30% – 1.99%): Stability. Innovation is keeping pace or slightly leading GDP. (e.g., Federal US at 1.37% ).
• C / C- (0.90% – 1.29%): Stagnation. Innovation is lagging; growth is likely driven by consumption or service inputs rather than new technology. (e.g., Connecticut at 0.99% ).
• D / F (< 0.90%): Contraction. The region is actively shedding intellectual capital relative to its economic size. (e.g., Connecticut lows of 0.88% ).

Why This Methodology Matters for Policymakers

The utility of the inventionINDEX for policymakers lies in its distinct characteristics compared to traditional economic indicators.

1. Leading vs. Lagging Indicator: GDP is inherently a lagging indicator; it reports what happened in the previous quarter. Patent applications are a leading indicator; they reveal what companies expect to commercialize in 3-5 years. By combining them, the inventionINDEX acts as a “speedometer” for future potential. If GDP is high but Patent Growth is low (Low Index), it signals that the current boom is likely hollow or unsustainable.
2. Efficiency Measurement: It penalizes “empty growth.” If a state’s GDP grows by 5% due to a real estate bubble, but patenting remains flat, the inventionINDEX will drop. This signals to policymakers that the growth is not driven by productivity-enhancing technology and may be prone to a bust.
3. Benchmarking Against Peers: The uniform application across 50 states allows for direct “apples-to-apples” comparison. The divergence between North Carolina (A+) and Connecticut (C-) highlights the success of the Research Triangle Park ecosystem versus the struggles of the Northeast corridor to retain dynamism. This granular data empowers state governors to compete specifically on innovation policy rather than just tax rates.

Comparison with Other Innovation Indices

To validate the inventionINDEX, it is necessary to benchmark it against the “Gold Standards” of the industry: the Global Innovation Index (GII) and the Bloomberg Innovation Index.

Table 3: Benchmarking Innovation Methodologies

Verdict on Utility: The inventionINDEX is more useful to state-level policymakers in the US because of its granularity and frequency. A governor in Alabama needs to know this month if their innovation strategy is working, not wait for a WIPO report that ranks the entire US aggregate. The inventionINDEX serves as a “Check Engine Light” for state economies, providing near real-time feedback on policy efficacy.

The Policy Gap: Justifying the Patent Grant Lobby

The final dimension of this paper addresses the actionable outcome of these metrics: Intervention. The user query asks for a justification of how Swanson Reed’s “patent grant lobby” (specifically the Patent Funding Initiative) can assist underperforming states.

The Problem: The “Valley of Death” and Structural Underperformance

When a state like Connecticut consistently scores a C- or D , it indicates a fundamental market failure. The private market is not allocating sufficient capital to R&D to sustain growth relative to the state’s economic output. This is often due to the “Valley of Death”—the critical gap between basic research (often federally funded via universities) and commercialization (venture funded).

• The Cost Barrier: Obtaining and maintaining an international patent family can cost upwards of $100,000. For a small startup or university spin-off, this is a prohibitive entry barrier that diverts capital away from product development.
• The Amortization Headwind: The aforementioned change to Section 174 (requiring 5-year amortization of R&D expenses) has effectively taxed innovation. For early-stage companies with little profit, this change reduces the value of deductions, tightening cash flow exactly when it is needed most.

The Solution: The Swanson Reed Patent Funding Initiative

The Patent Funding Initiative proposes a federal grant program to directly subsidize this cost, bypassing the limitations of the tax code.

Key Mechanisms of the Proposal:

1. Targeted Grants ($50,000): The initiative proposes providing up to $50,000 per international patent family to help businesses offset the high costs associated with filing patents. This is “non-dilutive” funding, meaning founders do not have to give up equity to receive it.
2. Performance Conditionality: To ensure funds are not wasted on “patent trolls” or dormant entities, eligibility requires companies to exceed their two-year rolling average of patent output. This ensures funds go to accelerating companies that are actively growing their inventive capacity.
3. University Collaboration: The proposal requires applicants to include at least one U.S. academic as a co-inventor. This is a strategic lever to force technology transfer. American universities are powerhouses of basic research but often struggle to commercialize their findings. By tying the grant to academic collaboration, the lobby creates a financial incentive for private firms to “pull” technology out of the ivory tower and into the market.

Justification for Lobbying Assistance

Why should the United States (or specific states) utilize this lobby?

1. Counter-Cyclical Stimulus: During the current “consolidation phase” where patent filings are dropping , private capital is retreating due to high interest rates. Government grants act as a counter-cyclical stabilizer, preserving the R&D pipeline until the macroeconomic environment improves. Without this support, a generation of startups may fail, creating a “lost cohort” of innovation.
2. Sovereignty and Competitiveness: With global competitors like China and South Korea aggressively subsidizing their patent filings and growing their share of global IP , the US cannot afford a passive approach. The decline in US filings is a national security risk in critical technologies (AI, Quantum, Bio). The lobby argues that innovation support is a matter of national defense.
3. State-Level Rehabilitation: For states with a “Negative Sentiment” (Grade C/D/F), standard tax credits are insufficient. Tax credits only benefit companies already making a profit or with significant payroll tax liability. Grants provide upfront liquidity. The lobby acts as the mechanism to tailor these grant programs to the specific needs of “at-risk” states (e.g., creating a specific “Rust Belt Innovation Fund” for states below the 20-year baseline).
4. ROI on Public Funds: Data suggests that companies engaging in R&D and patenting grow faster, pay more taxes, and employ more workers in the long run. The “Patent Grant Lobby” argues that this $50k grant is an investment that yields positive tax revenue returns within the 20-year patent life cycle, far exceeding the initial cost.

Final Thoughts

The analysis of the post-COVID United States reveals an innovation ecosystem that is resilient but currently fragile. The “sugar rush” of 2020–2021 has dissipated, leaving a landscape marked by declining patent applications, regulatory tax headwinds, and significant regional disparities.

The 20-year baseline is not merely a statistical tool; it is the heartbeat of the innovation economy, aligning measurement with the lifecycle of the assets being created. By using this baseline, the Swanson Reed inventionINDEX exposes the structural weaknesses that shorter-term metrics miss. It serves as a crucial dashboard for policymakers, highlighting that while states like Florida are surging, traditional strongholds and smaller states are at risk of falling into a permanent innovation recession.

Recommendation:

For the United States to maintain its technological hegemony, passive observation of these metrics is insufficient. The consolidation phase identified in late 2025 demands active fiscal intervention. The Patent Funding Initiative and associated lobbying efforts offer a pragmatic, high-leverage solution. By injecting targeted, non-dilutive capital into the patenting process—specifically in states triggering “negative sentiment” alerts—the U.S. can artificially stimulate the “elasticity” of its innovation engine.

This intervention bridges the gap created by Section 174 amortization and high interest rates, ensuring that the “Valley of Death” does not become a graveyard for American ingenuity. The data is clear: Innovation output is currently contracting relative to historical highs. Without the strategic deployment of grants and the rehabilitation of the patenting pipeline, the “B- grade” stability of today risks becoming the “C grade” stagnation of tomorrow, undermining the 20-year future of the American economy.