Connecting the Firm to External Knowledge
Chapter 4: Public Intervention and Innovative Networking: Firm-level Evidence on the Opening-up of the Innovation Process
4.1 INTRODUCTION The main argument in favour of public intervention in R&D and innovation processes lies in the existence of market failures (Arrow, 1962). Due to these failures unintended knowledge spillovers occur and the appropriability of benefits from the innovation hinders further activity (Martin and Scott, 2000). Enterprises are then assumed to avoid R&D investment through lack of necessary incentives (Hall, 2002). Hence, supporting innovation is a major ingredient of science and technology policy, which ultimately aims to enhance entrepreneurial performance and so stimulate economic growth. Policy-makers have at their disposal a large number of policy instruments to enhance R&D and innovation. These range from passive instruments like tax policy through fiscal incentives (Hall and Van Reenen, 2000; Klette et al., 2000; Guellec and Van Pottelsberghe, 2003) and subsidies (Klette et al., 2000; Guellec and Van Pottelsberghe, 2003) to more active involvement by performing R&D in public research organisations designed to create spillovers (Martin and Scott, 2000; OECD, 2002b). This chapter focuses on subsidies. These relate directly to the innovation projects the enterprises perform themselves (Busom, 2000). Although the rationale behind the public funding of innovation is theoretically well grounded, the empirical literature is ambiguous in its assessment of the benefits of public funding of R&D and innovative activity (David et al., 2000, Klette et al., 2000) and there is little consensus on the effectiveness of R&D subsidies (Jaffe, 2002; Hall, 2002). This lack of consensus can be attributed to several factors. First, subsidies...
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