Is Financial Support for Private R&D Always Justified? A Discussion Based on the Literature on Growth

Benjamin Montmartin and Nadine Massard

No 2013-34, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: Many economists have long held that market failures create a gap between social and private returns to Research and Development (R&D), thereby limiting private incentives to invest in R&D. However, this common belief that firms significantly underinvest in R&D is increasingly being challenged, leading the rationale behind public support for private R&D to be questioned. In this paper, we attempt to clarify the perspectives of two sources: the theoretical literature on endogenous growth, and its recent developments in integrating a geographical dimension, and the empirical literature that measures the social returns to R&D in relation to the private returns. Ultimately, we are able to clearly distinguish among different types of market failures and compare their relative impact on the gap between the private and social returns to R&D. Two main conclusions are reached. First, systematic firm underinvestment in R&D is not demonstrated. Second, even though instances of underinvestment do occur, they are mainly explained by surplus appropriability problems rather than by knowledge externalities. This suggests the need for a new policy mix that employs more demand-oriented instruments and is more concentrated on identifying efficient allocations among activities rather than merely increasing global private R&D investment.

Keywords: Returns to R&D; market failures; R&D based growth; economic geography; R&D policy (search for similar items in EconPapers)
JEL-codes: E61 O38 O41 R11 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2013-09
New Economics Papers: this item is included in nep-cse and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Journal of Economic Surveys, 2015, vol. 29, no. 3. pp. 479-505.

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http://195.220.190.85/GREDEG-WP-2013-34.pdf First version, 2013 (application/pdf)

Related works:
Journal Article: IS FINANCIAL SUPPORT FOR PRIVATE R&D ALWAYS JUSTIFIED? A DISCUSSION BASED ON THE LITERATURE ON GROWTH (2015)
Working Paper: Is financial support for private R&D always justified ? A discussion based on literature on growth (2013)
Working Paper: Is financial support for private R&D always justified ? A discussion based on literature on growth (2013)
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