Edited by Dominique Foray
Chapter 12: What Does Economic Theory Tell us About Mission-oriented R & D?
12. What does economic theory tell us about mission-oriented R&D?1 David C. Mowery INTRODUCTION: THE ELEPHANT IN THE ROOM 12.1 The economic rationale for public funding of research and development (R&D) has remained largely unchanged since its articulation in seminal work by Nelson (1959) and Arrow (1962). Both scholars argued that the difficulties of appropriating the returns from investment in research and innovation lead private firms to underinvest in these activities, creating a ‘market failure’ that can be addressed by (among other things) public investment in R&D. In a number of respects, this theoretical rationale echoed the policy arguments laid out by Vannevar Bush in his 1945 report, Science: The Endless Frontier. The market failure rationale remains central to the economic analysis of science and technology policy. Although the market failure rationale retains great rhetorical influence as a justification for public R&D investments, casual empiricism suggests that its influence over such public investments is modest. Most Organisation for Economic Co-operation and Development (OECD) nations’ R&D investment budgets are dominated by programs that serve specific government missions, such as defense, agriculture, health, energy, and other activities. The ‘market failure’ rationale underpins less than 50 percent of public R&D spending in most of these economies. The dominance of government R&D spending by mission-oriented programs is hardly a new discovery.2 But the apparent failure of the primary theoretical justification for public R&D investment to explain the allocation of these funds has some important implications....
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