Author(s)
Source
Journal of Economic Perspectives, Vol. 33, No. 3, pp. 163-184, 2019
Summary
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.