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