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

  • Benjamin Montmartin

    (GREDEG CNRS
    University of Nice-Sophia Antipolis, France)

  • Nadine Massard

    (GATE Lyon Saint-Etienne
    Jean Monnet University, Saint-Etienne, France)

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.

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Paper provided by Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis in its series GREDEG Working Papers with number 2013-34.

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Length: 47 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:gre:wpaper:2013-34
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