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Is financial support for private R&D always justified ? A discussion based on literature on growth

  • Benjamin Montmartin

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS - UNS - Université Nice Sophia Antipolis)

  • Nadine Massard

    ()

    (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS)

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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Date of creation: 20 Sep 2013
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Handle: RePEc:hal:wpaper:halshs-00864011
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  9. Robert Tamura, 2004. "Human capital and economic development," FRB Atlanta Working Paper 2004-34, Federal Reserve Bank of Atlanta.
  10. Corinne Autant-Bernard & Muriel Fadairo & Nadine Massard, 2013. "Knowledge diffusion and innovation policies within the European regions: Challenges based on recent empirical evidence," Post-Print halshs-00756466, HAL.
  11. Benjamin Montmartin, 2013. "Centralized R&D Subsidy Policy in an NEGG Model: A Welfare Analysis," Recherches économiques de Louvain, De Boeck Université, vol. 79(1), pages 5-34.
  12. Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, vol. 41(3-5), pages 771-782, April.
  13. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers.
  14. Charles I. Jones & John C. Williams, . "Measuring the Social Return to R&D," Working Papers 97002, Stanford University, Department of Economics.
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