1. Why do Governments Have R&D Outline and Innovation Policies? 1. Economic rationale for government support of • Social return to R&D>Private return => private The Economics of R&D Tax private R&D. sector underprovision. Some reasons for this: 2. Trends in government support of private R&D: – Difficult to evaluate and fund some kinds of research. Credits direct spending and tax incentives. • External finance means revealing ideas. 3. Structure of existing R&D credit. • Benefits so diffuse recipients hard to organize or identify. • Need large organization for implementation/commercialization Professor Bronwyn H. Hall 4. Effectiveness of existing R&D credit. but such organizations not necessarily good innovators. 5. Comparison of U.S. taxation of R&D with other University of California at Berkeley • Standards-related R&D - public goods nature of standards. major industrial countries. – National security and/or strategic industries Oxford University • “ripe” for technical advance. 6. Policy issues • closely linked to other industries. • enables progress in many other industries (e.g., semiconductors). 3/21/01 Economics of R&D Credits 2 3/21/01 Economics of R&D Credits 3 1. Why do Governments Have R&D 1. Private and Social Returns to R&D 1. Determinants of the Wedge between - Simple Graph Social and Private Returns to R&D and Innovation Policies? (cont.) – Education/human capital and imperfect capital • Magnitude varies by country, industry, markets. technology type. Return or Cost of • Individuals face differing financial constraints in R&D • Ordering of projects may differ using the investing in human capital - equality of opportunity two criteria. Examples: argues in favor of education subsidies. Cost S • Externalities for society from human capital – Cures for developing country diseases (malaria) C Social returns formation by individuals (assuming they do not versus developed country diseases. capture all the benefits in their wages). Private returns – Products with marginal improvements that take the whole market – e.g., “me too” drugs R C R S Level of R&D 3/21/01 Economics of R&D Credits 4 3/21/01 Economics of R&D Credits 5 3/21/01 Economics of R&D Credits 6 1
1.Variation in the Wedge between Social and Private Returns 1. Economists’ Solutions to Market 1. Determinants of the Wedge between Failures Social and Private Returns to R&D Social return • Internalize the externality: Types of research vary greatly in returns: – Research joint ventures between firms 1. “Pure” science: Social return – Create a property right (patents or other IPR) – Bohr - quantum mechanics Private return Problem: may give monopoly power, reduce output. – basic genome mapping. Cost 2. Goal-oriented applied research: • Subsidize the activity; reduce its cost. Cost – Edison - light bulb/ phonograph Private return • Tax the activity (in this case, a credit) – New electric batteries. • Regulation (not very effective in this case)? 3. Scientific discoveries from solving practical problems: – Price controls (wage controls on S&E?) – Pasteur - bacteriology via wine research Development Basic research – Quotas - mandating R&D performance – Mathematics via encryption research. 3/21/01 Economics of R&D Credits 7 3/21/01 Economics of R&D Credits 8 3/21/01 Economics of R&D Credits 9 Total R&D Spending in the United States 1. Subsidizing R&D 1. The Tradeoff 1953-2000 $300,000 ������������������������������������������������������������������������������ $250,000 • Direct government subsidy: • Who chooses projects better, government or ������������������������������������������������������������������������������ ������������������������������������������������������������������������������ industry? targeted subsidies vs. broad credits. – science/basic research $200,000 ������������������������������������������������������������������������������ ������������������������������������������������������������������������������ Millions of 1996$ – education • Who performs projects better, government or ������������������������������������������������������������������������������ ������������������������������������������������������������������������������ $150,000 – defense/space industry? direct spending vs. subsidy or credit ������������������������������������������������������������������������������ ������������������������������������������������������������������������������ – health • Politics? $100,000 ������������������������������������������������������������������������������ ������������������������������������������������������������������������������ ������������������������������������������������������������������������������ • Tax policy: – Which part of the budget? $50,000 ������������������������������������������������������������������������������ ������������������������������������������������������������������������������ ������������������������������������������������������������������������������ – R&D is expensed - faster than economic depreciation. – Which congressional district benefits? – R&E tax credit (federal and some states) – focus today . $0 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 – Returns to foreign R&D repatriated at low tax rates. Year �� ��� ���� Federal R&E Tax Credit Federal R&D Spending Industry R&D Spending Other R&D Spending 3/21/01 Economics of R&D Credits 10 3/21/01 Economics of R&D Credits 11 3/21/01 Economics of R&D Credits 12 2
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