Inadequate Incentive for Innovation

The links between competitiveness and technology, and the questions those links raise for technology policy or, more broadly, industrial policy, have major implications for a nation's wealth, living standards, and national security. Policy-makers and economists have long understood technological innovation as important for economic growth. It is also well understood that under some circumstances competitive markets will fail to generate adequate incentives to innovate.

Market Failure and Spillovers

The market failure justifications for government support of R&D are well rehearsed and widely discussed in the innovation economics and technology policy literature. Three main market failures are ubiquitous for R&D: increasing returns, from both externalities and indivisibilities (such as fixed R&D costs), and uncertainty. All are important for thinking about science and technology policies, but the increasing returns due to non-rival-good externalities are of most relevance for the ATP's focus on spillovers.

Empirical evidence from a wide variety of studies, industries, and methodologies supports the view that the social benefits of R&D are consistently high and, importantly for policymaking, higher than the private benefits, by factors typically ranging from 30 to 80 percent and sometimes as much as 300 percent. The persistence of high social rates of return to R&D is an indication that not enough is being invested in R&D from a social maximizing point of view. Otherwise returns to R&D would return to more normal rates.

Recognizing this chronic underinvestment, when the ATP was created by the Omnibus Trade and Competitiveness Act of 1988, its goals were “to assist U.S. business in creating and applying the generic technology and research results to