Back to Basics: Basic Research Spillovers, Innovation Policy and Growth

Abstract

This paper introduces a model of endogenous growth through basic and applied research. Basic research differs from applied research in the nature and the magnitude of the generated spillovers. We propose a novel way of empirically identifying these spillovers and embed them in a general equilibrium framework with private firms and a public research sector. After characterizing the equilibrium, we estimate our model using micro-level data on research expenditures by French firms. Our key finding is that standard R&D policies can accentuate the dynamic misallocation in the economy. We also find a strong complementarity between the property rights of basic research and the optimal funding of public research.

Keywords: Innovation, basic research, applied research, research and development, government spending, endogenous growth, spillover

JEL Classification: O31, O38, O40, 043, 047, L78