DP13833 From Local to Global: A Unified Theory of Public Basic Research

Author(s): Hans Gersbach, Ulrich Schetter, Samuel Schmassmann
Publication Date: July 2019
Date Revised: July 2019
Keyword(s): basic research, economic growth, international trade, knowledge spillover, optimal policy
JEL(s): F10, F43, H40, O31, O38
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13833

We analyze public investment in basic research in a multi-country, multi-industry environment with international trade. Basic research generates ideas which private firms take up in applied research to develop new varieties. A country's current specialization in international trade thus determines which ideas can be commercialized domestically. We demonstrate that the equilibrium is consistent with key patterns observed from the data. We then compare basic research investments of national governments with optimal investments of a global social planner. We show that national investments are inefficient along three dimensions: (1) There is typically too little total investment in basic research. (2) Basic research is too heavily concentrated in industrialized countries. (3) And basic research is potentially insufficiently directed to support innovation in complex, high-tech industries.