Patent Nationally, Innovate Locally
76 Pages Posted: 8 Oct 2015 Last revised: 5 Aug 2017
Date Written: July 26, 2016
Anxiety over the efficacy and fairness of the patent system has spawned a variety of proposals to rely more heavily on direct public subsidies for innovation, such as research grants and tax incentives. Applying economic theories of federalism, this Article shows that these public finance alternatives to IP — which I call “innovation finance” — should sometimes be the responsibility of subnational governments such as states and cities, rather than the federal government. The economic theory of federalism prescribes that public goods should be supplied by the smallest jurisdiction that internalizes the costs and benefits of its actions without creating externalities (spillovers) for other jurisdictions. States cannot reliably internalize the benefits of patent regimes that require significant public disclosure of information. But they can internalize many of the economic benefits of direct public spending on innovation. Indeed, a long line of theoretical and empirical research suggests that the economic benefits of innovation — mainly, high-salaried employment and long-term economic growth — remain highly concentrated in certain geographic locations. Therefore, optimal allocation of government requires that we presume subnational jurisdiction over innovation finance unless significant cross-border spillovers or some other collective action failure indicates that national intervention is necessary. The result should be more effective innovation policies that are tailored to the needs and conditions of disparate geographic regions and the demands of a mobile populace, and more precise clustering of innovation industries across the country. Moving from theory to reality, the Article demonstrates that states already provide significant funding for private sector innovation, and that federal funding for research is actually the exception rather than the rule. Lastly, the Article highlights a major weakness of economic federalism theory in this context: it fails to take into account preexisting inequalities among regions that may prevent under-resourced locations from mobilizing effective innovation strategies, thereby locking them out of the competition to grow innovation clusters. I argue that pervasive regional inequality creates an independent basis for federal intervention.
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