Chapter 2: Economic Rationale for Public Investment
2. Economic rationale for public investment GOVERNMENT’S ROLE IN INNOVATION The theoretical basis for government’s role in market activity is based on the economic concept of market failure. Market failure is typically attributed to market power, imperfect information, externalities, and public goods. The explicit application of market failure to justify government’s role in innovation, and in R&D activity in particular, is a relatively recent phenomenon within public policy. Many point in the United States to President George H.W. Bush’s 1990 US Technology Policy (EOP, 1990) as that nation’s first formal domestic technology policy statement. Albeit an important initial policy effort, it failed to articulate a foundation for the government’s role in innovation and technology. Rather, it implicitly assumed that the government had a role and then set forth the general statement: ‘The goal of US technology policy is to make the best use of technology in achieving the national goals of improved quality of life for all Americans, continued economic growth, and national security.’ (EOP, 1990, p. 2.) President William Clinton took a major step forward from the 1990 policy statement in his 1994 ‘Economic Report of the President’ by articulating first principles about why government should be involved in the technological process: ‘The goal of technology policy is not to substitute the government’s judgment for that of private industry in deciding which potential “winners” to back. Rather, the point is to correct market failure.’ (EOP, 1994, p. 191.) President Clinton’s 2000 ‘Economic Report of the President’ elaborated on...
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