Heart of Darkness: Modeling Public-Private Funding Interactions Inside the R&D Black Box

Abstract

This paper is a first step toward closing the analytical gap in the extensive literature on the results of interactions between public and private R&D expenditures, and their joint effects on the economy.Econometric studies in this area report a plethora of sometimes confusing and frequently contradictory estimates of the response of company financed R&D to changes in the level and nature of public R&D expenditure, but the necessary theoretical framework within which the empirical results can be interpreted is seldom provided. A major cause of "inconsistencies" in the empirical literature is the failure to recognize key differences among the various policy "experiments" being considered -depending upon the economy in which they are embedded, and the type of public sector R&D spending that is contemplated. Using a simple, stylized structural model, we identify the main channels of impact of public R&D. We thus can characterize the various effects, distinguishing between short-run and long-run impacts that would show up in simple regression analyses of nominal public and private R&D expenditure variables. Within the context of our simple model it is possible to offer interpretations that shed light on recent cross-section and panel data findings at both high (i.e. national) and low (specific technology area) levels of aggregation. I. BLACK BOXES TYPICALLY HOLD MORE HEAT THAN LIGHTThe interior of the black box of technology by now has become increasing crowded with economists of various stripes, and although growing areas are illuminated by the accumulating results of their investigations, some large regions of darkness remain. 1One of the darkest patches of terrain is the realm where public and private R&D interact. It is not that this "heart of darkness" has remained infrequently visited. Quite the contrary: a survey of the econometric literature (which we undertook in collaboration with Andrew Toole) has identified more than 50 papers, most of them quite recent, that seek to address in one way or another the issue of the nature of those interactions. 2The fact that the question keeps being raised, however, is in this case symptomatic not only of the interest that attaches to it but of the elusiveness of a satisfyingly conclusive answer.Quite obviously it is a matter of considerable importance for science and technology policy-makers to know whether government R&D expenditures and companyfinanced R&D investments behave like substitutes or like complements. Insofar as the rationale for government support of R&D rests on the presupposition that too little research would be performed were the private sector to be left to its own devices, intense concern surrounds the possibility that public allocations for that purpose are being substituted for investments that firms would otherwise undertake. There is, in short, a worry that private R&D may be "crowded out" and the use of taxpayers money rendered far less effectual than might be supposed in augmenting society's investment in generating technological progre...

Energy, the Environment, and Technological Change

“…Yet, these assumptions have important ramifications for the total cost of a climate policy as well as the conclusions drawn about the degree to which estimates based on exogenous technology assumptions are biased. There is only a small empirical and conceptual literature to guide assumptions of the degree of crowding out, primarily on the elasticity of the science and engineering workforce in relation to greater R&D incentives (David and Hall, 2000;Goolsbee, 1998;Wolff, 2008).…”

Gains and Pains from Contract Research: A Transaction and Firm-Level Perspective

“…Apart from this, firms might choose to deliberately install competition to stimulate internal R&D. Such form of competition could also prove to be helpful in overcoming internal resistance to innovation projects. Finally, firms could get access to public R&D funding more easily when they involve public contract research organizations like universities or research institutes (David and Hall, 2000) or when the R&D activities are carried out in particular regions (Tapon and Cadsby, 1994).…”

Research policy and endogenous growth

“…Two policies are equivalent in terms of the public budget if they imply the same …scal e¤ort. 8 Thus, if the government's budget is given by…”