An International Comparative Analysis
Chapter 10: Conclusions
R&D activities, especially when carried out at the enterprise level, are an important input to domestic technology development. There is now enough consensus that R&D cannot be left entirely to the private sector. This consensus is based on the powerful theoretical result enunciated by Arrow (1962) in one of his much cited papers. His argument is that if R&D activities are entirely left to the private sector, then this will soon lead to underinvestments. This is based on the fact that private sector ﬁrms fail to recoup the full returns from their investments in R&D owing to their diﬃculty in appropriating the full returns from their own research eﬀorts, despite the existence of institutional mechanisms such as patenting, which bestows at least a temporary monopoly to generators of technology. Economists have attempted to capture this by computing the spillover gap or in other words the gap between private and social rates of returns for a sample of innovations. Available empirical estimates of the spillover gap indicate that the desire to underinvest in R&D exists in free market economies such as the United States, Western Europe and Japan. In order to reverse this trend, governments have been putting in place a whole host of mainly ﬁscal measures to encourage enterprises to commit more resources to R&D. These ﬁscal measures manifest themselves in the form of various types of tax subsidies and research grants. There is now a considerable amount of research on the...
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