Government policy towards innovation/R&D :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Government policy towards innovation/R&D
Outline :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Outline Government R&D policy
Technological Performance
Innovation and Finance
Why do governments have innovation policies? :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Why do governments have innovation policies? Difficult to evaluate and fund some types of research in the private sector
obtaining external finance means revealing idea
benefit diffuse - cannot identify recipients easily, so difficult to collect payment (environment; defense)
externalities are large, players are small (agriculture)
investors cannot evaluate projects very well due to extreme uncertainty
To provide standards, which are public goods
Why do governments have innovation policies? :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Why do governments have innovation policies? To encourage strategic industries
important for national security
“ripe” for technical advance
closely linked to other industries
technical advance facilitates progress in other industries
To provide education and human capital
imperfect capital markets imply that private sector will not supply enough finance for higher education
Summary:
social return to R&D > private return to R&D
Determining the optimal subsidy :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Return
or cost
of R&D Level of R&D
spending Optimal
subsidy Determining the optimal subsidy Optimal competitive
level of R Optimal social
level of R
Why the gap between private and social return? :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Why the gap between private and social return? Knowledge spillovers
knowledge created by one agent can be used by another without compensation, or with investment less than the cost of the knowledge creation
Market (pecuniary) spillovers
Some of the benefits of the knowledge creation (new products/processes) flow to purchasers via the operation of market forces, reducing the price
Network spillovers
Value of a new technology strongly dependent on development of related technologies (the hardware/software case)
What’s wrong with this simple graph? :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION What’s wrong with this simple graph? Magnitude of the spillover gap varies
by country
by industry
by technology type
Project ordering varies depending on whether you use social or private returns to order
Spillover gap varies by country :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Spillover gap varies by country small open economies like those in Scandinavia, Netherlands, etc.
Most R&D benefits there may spill to other countries
vs. large semi-open economies like the U.S.
less leakage
Spillover gap varies by industry :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Spillover gap varies by industry Consumer electronics or autoparts/metal parts or airframes
High appropriability, possibly fewer spillovers
vs. pharmaceuticals for life-threatening diseases, environmental and pollution control
conventional as well as R&D externalities
vs. telecommunications/ electronics/ semiconductors/IT
appropriability may be low and there are many small firms
Project ordering can differ :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Project ordering can differ according to whether you use social or private returns to rank projects
Cures for developing country diseases vs developed country diseases.
Targeted government policy that favors one industry or technology over another changes ordering
=> More than one policy is useful, depending on the goal
Standard policy instruments for market failure - summary :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Standard policy instruments for market failure - summary Internalize the externality
R&D joint ventures between firms in the same industry
Create a property right in the innovation (the patent system)
Subsidize or tax the activity
widely used policies
Regulation? - not likely or usua
Quotas - mandating R&D performance
1. Internalizing the externality :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION 1. Internalizing the externality Exempt R&D joint ventures from antitrust regulation
sometimes with federal support, e.g., Sematech
Create a property right in the output of the innovativeactivity (e.g., patent, trademark, copyright, etc.)
Allows firms exclusive use of the innovation (monopoly)
May allow trading of ideas, promoting spillovers, facilitating cumulative and complex innovation
Both solutions have costs
Deadweight loss (creation of monopoly power)
Projects chosen by industry (omits some with high social and low private returns)
2. Subsidize or tax the activity :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION 2. Subsidize or tax the activity Direct government subsidy - where gap is large and beneficiaries uncertain and diffuse
science/basic research
higher education
defense/space/health
Tax policy - where gap is smaller; industrial R&D
R&D is expensed
R&D tax credit (federal and state)
Returns to foreign R&D repatriated at low tax rates
The tradeoff between direct and indirect financing:
Who chooses projects better?
Who performs projects better?
Politics and capture?
Slide 14 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION
Science and Engineering Graduates per 1000 of population aged 20-29 in 1999 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Science and Engineering Graduates per 1000 of population aged 20-29 in 1999 Source: EU Innovation Scoreboard 2001 %
Changes in Numbers taking First Degree Courses in UK 1994/5 to 1999/2000 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Changes in Numbers taking First Degree Courses in UK 1994/5 to 1999/2000 Source: Roberts Review
Science and Linkages in Selected Countries :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Science and Linkages in Selected Countries Measured by the average number of scientific papers cited in US patents depending on applicants’ nationality Source: NISTEP (2000) based on data from CHI Research Inc. Quoted in Benchmarking Industry-Science Relationship OECD 2002
Public R&D Expenditures(GOVERD & HERD) (% GDP) :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Source. EU Innovation Scoreboard 2002 Public R&D Expenditures(GOVERD & HERD) (% GDP)
Business Expenditure on R&D as % of GDP :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Source. EU Innovation Scoreboard 2002 Business Expenditure on R&D as % of GDP
EPO High-Tech Patent Applications(per million population) :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Source. EU Innovation Scoreboard 2002 EPO High-Tech Patent Applications(per million population)
USPTO High-Tech Patent Applications(per million population) :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Source. EU Innovation Scoreboard 2002 USPTO High-Tech Patent Applications(per million population)
High-Tech Venture Capital Investment(% GDP) :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Source. EU Innovation Scoreboard 2002 High-Tech Venture Capital Investment(% GDP)
Slide 23 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Stock Markets Falls 2001 -2002
Slide 24 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION The incidence of innovation
Slide 25 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION The incidence of innovation
Slide 26 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION The incidence of innovation
Slide 27 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Finance for SMEs
Slide 28 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Finance for SMEs
Finance for Innovative SMEs :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Finance for Innovative SMEs Innovators are more likely to be seeking external finance and to seek larger amounts
Innovators have a higher failure rate, but over three-quarters receive the whole of what they sought
Over the past decade SMEs have reduced their reliance on bank borrowing and have a more diverse financial structure
Innovators rely less on bank financing, but the proportions of their support coming from venture capitalists and from existing shareholders is the same as those for non-innovators
Barriers to Innovation :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Barriers to Innovation When firms are asked which factors inhibit their innovation they score risk and cost most highly
This has not changed in recent years, but the levels of these barriers have declined. This suggests that the moderation of innovation activity may be due to lower incentives to innovate
The only factor showing a higher importance as a barrier to innovation in recent years is the imposition of legislation, regulations etc
Barriers to Innovation :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Barriers to Innovation
Growth Constraints :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Growth Constraints Over the past decade there has been a substantial reduction in the proportion of SMEs selecting finance as a significant growth constraint
Increased competition and, in recent years, market growth have risen in their importance as growth inhibitors
Larger businesses are starting to recognise how important are skill constraints on growth, particularly management skills
Innovators score market growth and competition and skills as their growth constraints
Factors Limiting Ability to Grow% of firms regarding these factor as crucial 1991, 1997 and 2002 Surveys :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Factors Limiting Ability to Grow% of firms regarding these factor as crucial 1991, 1997 and 2002 Surveys