Do spillovers justify subsidies to commercial R&D? : four microeconometric essays

Abstract

Chapter 1: In the introductory chapter, I place my thesis in an empirical research tradition going back to the mid-19S0s, investigating the economics of technological change. Key issues have been the private and social returns to R&D, and the scope for technology policy in enhancing economic growth. It is widely accepted that the social returns to R&D is greater than the private returns, and that public support for R&D may be welfare improving. At the same time, a number ofissues regarding the extent of the market failure and the governments' ability to improve on the market solution are unresolved. The main part of the introduction summarizes the following four chapters of the thesis. At the end I briefly reflect on my findings and their relevance for technology policy. Chapter 2: Economists have recently drawn attention to the importance of generic or general purpose technologies (GPTs) and their significance for economic growth. An interesting part of this research identifies coordination problems in the introduction of GPTs, and the potentially large benefits in coordinating research and product development. Thinking about information technology as a GPT, with the associated coordination problems, seems to fit well with the motivation behind governmental support schemes to IT and related hightech industries in Norway. The first part of this essay focuses on a series of such IT-programs that have been implemented in Norway from the early 1980s with the objective of coordinating the development of information technology and its application throughout the economy. The second part of the essayexamines in some detail the largest of these programs through its planning and implementation stages, and emphasizes how closely it is connected to recent economic analysis ofGPTs. The third part examines to what extent these governmental plans and subsidy schemes have been successful in creating economic results in terms of growth and profits in the IT and IT-related industries. The final part of the essay discusses some lessons about the problems with technology policy at a practicallevel. Chapter 3: A number of market failures have been associated with R&D investments, and significant amounts of public money have been spent on programs to stimulate innovative activities. This essay reviews some recent microeconometric studies evaluating effects of government-sponsored commercial R&D, and pays particular attention to the conceptual problems involved. Neither the firms receiving support, nor those that do not receive support, constitute random samples. Furthermore, those not receiving support may be affected by the programs due to spillover effects which often are the main justification for R&D subsidies. Constructing a valid control group under these circumstances is difficult, and the essay draws attention to some recent advances in econometric methods for evaluation studies based on non-experimental data. The essayalso discusses some analytical questions beyond these estimation problems that need to be addressed in order to assess whether R&D support schemes can be justified. For instance, what are the implications if firms' R&D investments are complementary to each other, and to what extent are potential R&D spillovers internalized in the market? Chapter 4: Labor mobility is often considered to be an important source of knowledge spillovers, making it difficult for firms to appropriate returns to R&D investments. In this essay I argue that inter-firm transfers of knowledge embodied in people should be analyzed within a human capital framework. Testing such a framework using a matched employer-employee data set, I find that the technical staff in R&D-intensive firms pays for the knowledge they accumulate on the job through lower wages in the beginning of their career. Later they earn a return on these implicit investments through higher wages. This suggests that the potential externalities associated with labor mobility, at least to some extent, are internalized in the labor market. Chapter 5: Most R&D projects fail from a commercial point ofview, and technological shifts may quickly turn even successful innovations into failure. It is, however, possible that projects which fail commercially produce knowledge with some social value. Such knowledge is likely to be embodied in workers or teams ofworkers. In order to evaluate the social returns to research, it is therefore desirable to trace workers as they move across firms and industries. In this essay I utilize a large matched employer-employee data set and test for the existence of potential knowledge spillovers transmitted through the labor market. The specific case analysed is a series of Norwegian IT-programs so far considered unsuccessful, but which recently have been linked to the rise of a new generation ofsuccessful IT-firms. It has been argued that know-how and networks built up in leading companies during the programs still 'fertilize' the Norwegian IT-industry. I find little support for this claim. Workers with experience from companies that received R&D subsidies were largely re-employed in IT-industries, but they have not outperformed similar workers without such experience. An analysis of firms that are spin-offs from formerly subsidized IT-firms reveals that they perform below, rather than above, average.