Knowledge spillovers and R&D subsidies to new, emerging technologies

Abstract

Is knowledge spillover a rationale for supporting R&D on new, emerging technologies more than R&D on other technologies? In this paper, I analyze whether innovation externalities caused only by knowledge spillovers differ between technologies of different maturity. I show that R&D should not be subsidized equally across industries when the knowledge stocks differ. This is because knowledge spillovers depend on the size of the knowledge stock and the elasticity of scale in R&D production. R&D in the emerging technology should be subsidized more when the elasticity is smaller than one. However, R&D in the mature technology should be subsidized more when the elasticity is larger than one.

Keywords:

• innovation policy
• knowledge spillovers
• sector-specific R&D

JEL classification:

• O30
• O31

Notes

1. See Griliches (1995), Klette, Møen, and Griliches (2000), and Hall, Mairesse, and Mohnen (2010) for overviews.

2. Although few papers, to my knowledge, investigate the consequences of different maturity for R&D policy in closed economies, there are several studies of cross-country differences in technological development. Many of these studies focus on the distance to the technology frontier and differences in growth rates and income. See, for example, Aghion (2006) and Madsen (2008).

3. See, for example, Aghion et al. (2001) for more references on other leader and laggard quality improvement models.

4. The externality from the duplication effect does not matter for the allocation ratio between the R&D industries. If the firms account for duplication efforts, the first-order condition is given by , which gives the same allocation ratio as in the main text.

5. There is no investment in the emerging technology if there are constant returns to labor, (i.e. no stepping on toes), since the marginal product of labor in R&D production is always greater for the mature technology in this case.

6. This simple, partial maximization problem gives the same allocation rule between the two R&D industries as a full social planner problem where the resource allocation between final goods and R&D production is not given, see Appendix 3.

7. Tables from sensitivity analysis can be provided by the author upon request.