THE EFFECTS OF INNOVATION POLICIES ON BUSINESS R&D: A CROSS-NATIONAL EMPIRICAL STUDY

Abstract

This paper examines the effect of three major national innovation policies (patent protection, research and development (R&D) tax incentives, and government funding of business R&D) on business R&D spending. Unlike previous work, we also consider the effect of openness to international trade. We use data from nine OECD countries (Australia, Canada, France, Germany, Italy, Japan, Spain, UK, and USA) in 1985–1995. Our results show that all three innovation policies play a significant role in stimulating business R&D. Enforcement of patent right matters most to business R&D spending. In addition, R&D performed by the government has a positive effect on business R&D, whereas R&D by the higher education sector has a negative impact on business R&D. We also find modest empirical support to the positive role of openess to international trade in business R&D investment.

Keywords:

• Innovation policy
• R&D
• Tax incentive
• Patent policy

Acknowledgements

We thank Walter Park for generously providing data on patent rights through 1995 and offering helpful comments. We would also thank David Richardson, John Yinger, William Duncombe, Larry Schroeder, Margaret Kyle, participants at the NBER Productivity Program meeting, and two anonymous referees for their valuable comments on various drafts of this paper.

Notes

¹For a detailed discussion of trade-related international R&D spillovers, please see Keller (2004).

²The work by Bloom et al. (2000) includes the same variable in their estimation. A similar measure was also used by Stern et al. (2002) to account for the cluster-specific conditions for private sector R&D investment.

³See Table I for definitions of the variables in the model.

⁴Bloom et al. (2000) used a similar method to deal with the simultaneity issue.

⁵To industrial R&D performers, universities are a major competitor for both government and industrial R&D funds. As the universities intensify the effort for seeking external funding for R&D projects, the substitute effect will become more significant.

⁶For instance, in the US, several laws were passed, and various cooperative R&D initiatives such as R&D consortia were launched to emphasize the role of government in promoting dissemination and utilization of government-developed technologies in private sector in pursuit of industrial competitiveness and economic prosperity.

⁷We thank Bruno Van Pottelsberghe De La Potterie for generously providing the B-index data.

⁸The sources of information on national patent laws we checked include Baxter (1968–2002), Meller (1983–2002), and Vanhees (1997–2000).

⁹By definition, the preliminary injunctions are pre-trial actions that require individuals to cease an alleged infringement. Contributory infringement refers to actions that do not in themselves infringe a patent right but cause or otherwise result in infringement by others. Burden-of-proof reversals are procedures that shift the burden of proof in process patent infringement cases from the patentee to the alleged infringer.

¹⁰In each case, a Hausman test rejects the null hypothesis that a random effects model is appropriate.

¹¹This is done using the xtregar command in Stata.

¹²The modified Bhargava et al. Durbin–Watson statistics are between 1.53 and 1.72. They indicate that we cannot rule out the autocorrelation.

¹³In Arellano–Band dynamic estimator, the hypothesis tests reject the null hypothesis of no first-order autocorrelation in the differenced residuals, but do not reject the null hypothesis of no second-order autocorrelation, making usage of the technique appropriate.

¹⁴The long-term elasticity is calculated with the estimated parameters multiplied by (1/(1−β₁)). β₁ is the parameter of the lagged dependent variable.

¹⁵This result should be interpreted with caution. Since we do not distinguish the price effect in the business R&D investment, it is hard to say whether there exist a complementary relationship between public R&D an ‘real’ private R&D effort. Nevertheless, the business investment data have been adjusted to some extent because they are in constant $ (1995 prices and PPPs).