Governments of many OECD countries heavily support R&D and innovation activities in order to improve competitiveness and long-term growth. It is argued that public R&D funding is necessary because of market failures. In particular, the existence of spillover effects gives reasons for market failure: Firms that invest in R&D usually cannot reap all the benefits of their investment since the knowledge that is created within the R&D process is a public good and can also be used by third firms for free. Even if the invention is protected by patents, the knowledge is documented in the patent files and can be used by third parties to invent around. The uncontrolled diffusion of knowledge and in turn incomplete appropriability of benefits imply that the social returns of R&D are usually higher than the private returns. As a consequence, the socially optimal amount of R&D investment is larger than the privately optimal R&D investment and an underinvestment in private R&D takes place (Arrow, 1962). Many studies have confirmed the existence of such knowledge spillovers.
Nevertheless, concerns exist about the effectiveness of such policies in general and about the best instrument in particular (Fier and Czarnitzki 2005). In order to fully evaluate the efficiency of public R&D measures, potential benefits have to be compared with costs. In addition to the pure programme costs (amount of funding), crowding out effects may take place if publicly-funded R&D may completely or partly displace privately funded R&D. As a consequence, the costs of such policy might offset the intended benefits. Furthermore administrative costs and costs due to tax distortions matter. In addition to effects on private R&D expenditure, the impact on overall economic targets such as employment and productivity growth also have to be taken into account and have to be evaluated. This project aims at summarising the up-to-date results in the literature with respect to the economic importance of publicly funded R&D in both industry and academics.

Selected Publications

Discussion and Working Papers