Chapter 16: R & D Investment Under Uncertainty: The Role of R & D Subsidies and Patent Policy
16. R&D investment under uncertainty: the role of R&D subsidies and patent policy Dirk Czarnitzki and Andrew A. Toole INTRODUCTION 16.1 Since business investment in research and development (R&D) is a critical factor driving innovation and economic growth, it is important to understand how public policies like R&D subsidies and intellectual property protection influence private incentives for R&D investment. There is now a sizable literature on how public R&D policies might ‘correct’ for underinvestment in business R&D resulting from market failures or various capital market imperfections leading to financing constraints. The seminal papers are Nelson (1959) and Arrow (1962). One theoretical argument suggests that market failures in R&D occur due to positive externalities in knowledge-generating processes. For instance, Arrow (1962, p. 615) states that: No amount of legal protection can make a thoroughly appropriable commodity of something as intangible as information. The very use of the information in any productive way is bound to reveal it, at least in part. Mobility of personnel among firms provides a way of spreading information. Legally imposed property rights can provide only a partial barrier, since there are obviously enormous difficulties in defining in any sharp way an item of information and differentiating it from similar sounding items. The public character of information leads to incomplete appropriability of investments aimed at creating knowledge. Knowledge cannot be kept proprietary, instead newly created knowledge will always leak out to competitors or others, and thus the social benefit will...
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