Edited by Anthony Bartzokas and Sunil Mani
Chapter 2: The financing of research and development
2. The ﬁnancing of research and development Bronwyn Hall1 INTRODUCTION It is a widely held view that research and development (R&D) activities are diﬃcult to ﬁnance in a freely competitive market place. Support for this view in the form of economic–theoretic modeling is not diﬃcult to ﬁnd and probably begins with the classic articles of Nelson (1959) and Arrow (1962), although the idea itself was alluded to by Schumpeter.2 The argument goes as follows: the primary output of R&D investment is the knowledge of how to make new goods and services, and this knowledge is non-rival – use by one ﬁrm does not preclude its use by another. To the extent that knowledge cannot be kept secret, the returns to the investment in it cannot be appropriated by the ﬁrm undertaking the investment, and therefore such ﬁrms will be reluctant to invest, leading to the under provision of R&D investment in the economy. Since the time when this argument was fully articulated by Arrow, it has of course been developed, tested, modiﬁed and extended in many ways. For example, Levin et al. (1987) and Mansﬁeld et al. (1981) found, using survey evidence, that imitating a new invention was not costless, but could cost as much as 50–75 per cent of the cost of the original invention. This fact will mitigate but not eliminate the underinvestment problem. Empirical support for the basic point concerning the positive externalities created by research that was made...
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