A Toolkit of Policies to Promote Innovation

Innovation and Economic Growth, Intellectual Property and Patents

Article Snapshot


Nicholas Bloom, John Van Reenen and Heidi Williams


Journal of Economic Perspectives, Vol. 33, No. 3, pp. 163-184, 2019


Innovation is an important route to continued productivity growth in the United States. Tax credits for research and development (R&D) are among the best ways to spur innovation. Evidence as to whether the patent system promotes innovation is inconclusive.

Policy Relevance

Federal funding of basic R&D should be increased. Increasing high-skilled immigration would spur innovation.

Main Points

  • Productivity growth in the United States has slowed; for technologically developed nations, continued innovation is an important route to sustained long-term productivity growth.
  • R&D comprises a smaller share of Gross Domestic Product in the US than in Japan and Germany.
    • The share of R&D funded by the federal government has declined over time.
    • Businesses spend over twice as much on R&D as the federal government.
  • Markets might under-supply innovation because of knowledge spillovers; after one firm creates a true innovation, imitators may take the first firm’s market share without paying R&D costs.
  • Positive knowledge spillovers result in overall social benefits of about 60 percent, and yields private benefits of about 15 percent; public research subsidies should be increased.
  • Tax credits for R&D increase R&D spending; the US federal R&D tax credit is in the bottom one third of OECD nations.
  • Government research grants can target R&D projects likely to lead to wasteful business-stealing; studies show that public R&D can increase private R&D funding.
  • Increasing the supply of scientists can boost R&D by reducing the price of R&D workers.
    • Immigrants to the United States boost innovation.
    • Quotas that limit immigration reduce invention rates.
    • Better schools and exposure to inventor role models will make it more likely for minorities, women, and children born in low-income families to become innovators.
  • Supreme Court cases limit the patentability of abstract ideas, including some medical diagnostic tests and software; evidence as to whether patenting abstract ideas would impede rather than encourage innovation is inconclusive.
  • Greater competition through open international trade increases innovation; also, opening up trade worldwide can increase innovation by increasing market size.
  • Policymakers should focus some R&D support on technologies that address climate change.
  • Tax credits and direct public funding are among the best uses of resources to stimulate growth through innovation; encouraging skilled immigration has big effects in the short run.

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