Evaluation of Public R&D Policy: A Meta-Regression Analysis

Syoum Negassi, Jean-François Sattin
2019 Technology and Investment  
Economic theory and empirical evidence indicate that technological innovation is an important determinant of long-term economic development. Various country policies have been launched in favour of private research and development (R&D) with economic development as the main objective. As often in economics, public intervention is grounded on the presumed existence of market failures. The purpose of this paper is two-fold. First, it provides an overview of the history of R&D-related tax policies
more » ... elated tax policies in more than ten industrial countries. Second, after reviewing the existent empirical evidence on the effectiveness of R&D tax credits policies, it presents a meta-regression analysis based on an econometric model. Our results show that an R&D tax credit is strongly significant in the studies taken cumulatively. ways. First, governments are responsible for providing new or improved technology for public sector functions (security, health, and communications) and R&D for these tasks may be performed in public research laboratories or contracted out to private firms and funded by public revenues. The second justification for public subsidies is to correct for market failures. Market failures in real and financial markets offer scope and justification for public support, as the return may be not sufficient to justify private investment. The broad consensus on the use of public support is based on the inefficiencies of the market. The neoclassical theory based on a positive externality argument suggests that, because of the "public good" characteristics of R&D activities, the level of private R&D expenditure would be systematically lower than the socially optimal level. These create a gap between private and social return on R&D, and as a result less than optimal levels of research. Incomplete appropriability of research output and externalities deriving from the public good nature of R&D are at the base of this [2] [3] . The characteristics of imperfect appropriability and imperfect excludability lead to the under-provision of innovation outputs by private decision makers in a market environment. This occurs since the benefits associated with R&D activities are easily and freely available to firms that are not engaged in R&D efforts. Indeed, the lack of full appropriability of R&D outcomes reduces the incentive to do R&D on the part of private firms so that, as in a classical Pigouvian context, government intervention through subsidization can reduce the extent of this "market failure". This argument has been widely criticized by several scholars. From an evolutionary perspective, Cohen and Levinthal [4] argued that knowledge cannot be so easily absorbed unless imitative firms, in turn, invest in a certain level of R&D effort: imitation is not costless and needs some pre-existing "hard core" R&D activity. This standpoint could lead to a paradoxical consequence: in an environment characterized by significant spillover effects, firms could have greater incentives to perform R&D since, in doing so, they might expand their absorptive capacity, i.e. their ability to benefit from the R&D efforts of others. In this way, they could more easily imitate and exploit market surpluses. As a consequence, the level of R&D could be too high (rather than too low), since many firms could undertake more R&D effort than that required to reach the optimal social results (e.g. by an increase of duplications in R&D expenditure). Some scholars have suggested that R&D should not be taken as a pure public good: a firm has a great number of tools to protect its inventive capacity, such as patents and secrecy [5] . Therefore, the extent of positive externalities in production can be very limited and ⁄or industry-specific, and the need for supporting R&D activities more controversial than it might appear at first glance. Additionally, knowledge is not subject to exhaustion or congestion because knowledge is a non-rival and partially excludable good [6] . The use of knowledge for one purpose does not diminish its supply or availability for other purposes. This "public good" feature demonstrates the social desirability of technological knowledge, but also presents a major disincentive for private investment.
doi:10.4236/ti.2019.101001 fatcat:booc36egzzfrtiofdg45x7lfwm