Working Paper: CEPR ID: DP13833
Authors: Hans Gersbach; Ulrich Schetter; Samuel Schmassmann
Abstract: We analyze public investment in basic research in a multi-country, multi-industry environment with international trade. Basic research generates ideas which private firms take up in applied research to develop new varieties. A country's current specialization in international trade thus determines which ideas can be commercialized domestically. We demonstrate that the equilibrium is consistent with key patterns observed from the data. We then compare basic research investments of national governments with optimal investments of a global social planner. We show that national investments are inefficient along three dimensions: (1) There is typically too little total investment in basic research. (2) Basic research is too heavily concentrated in industrialized countries. (3) And basic research is potentially insufficiently directed to support innovation in complex, high-tech industries.
Keywords: Basic Research; Economic Growth; International Trade; Knowledge Spillover; Optimal Policy
JEL Codes: F10; F43; H40; O31; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Insufficient total investment in basic research (H54) | Lower innovation capacity (O39) |
| Concentration of basic research in industrialized countries (O32) | Limits global diffusion of ideas (F69) |
| Misdirected investment in basic research (G31) | Fails to support innovation in complex high-tech industries (O38) |
| Public research investments (H54) | Innovation outputs (O36) |