Governments place great emphasis on the need to make firms more innovative. But what kinds of policies are likely to stimulate firms to introduce more innovations? Paul Geroski (London Business School and CEPR) attempted to answer this question at a lunchtime meeting organized by CEPR on 7 November 1996. He noted that most governments prefer to use simple, administratively convenient, non-discretionary policies to stimulate innovation.

Reporting on a series of simulations undertaken with a number of his colleagues, Geroski noted that the results suggested that money spent in this fashion did not seem very effective. To evaluate the effectiveness of various public policies towards innovation, the researchers had used an econometric model to simulate the effects of injecting £500m worth of spending in three different – and non-discretionary – ways: increasing R&D subsidies; stimulating aggregate demand; and cutting corporate taxes (and so increasing cash flow). In all cases, £500m worth of support did not appear to generate £500m worth of additional innovative activity (and may generate much less). Geroski noted that these numbers were very speculative, but that errors of measurement and some of the more speculative assumptions would have to be wrong by several orders of magnitude to overturn the conclusions.

The simulations also cast light on some of the determinants of innovative behaviour. First, it was found that the introduction of major innovations is stimulated by patents (but not the reverse). Second, the level of demand mainly affects the production of innovations and not patents. Third, cash flow has only a modest effect on patents and affects only the timing, but not the long-run rate of introduction, of major innovations. Last, patents, but not major innovations, are sensitive to R&D spending.

These results are broadly consistent with many studies which have found that administratively convenient, but poorly targeted, methods of spending are rarely effective in stimulating innovation. It follows that if governments are going to try to implement technology policies, they need to be designed to meet the needs of firms struggling to overcome barriers to innovation. One way forward would be to consider policies to support the development and diffusion of basic science, while another would be to use public procurement as a strategic lever to stimulate corporate innovative activity.