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

University of St. Gallen, SEPS Discussion Paper 2018-16

78 Pages Posted: 3 Jan 2019

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Ulrich Schetter

Harvard University - Center for International Development (CID)

Samuel Schmassmann

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: December 17, 2018

Abstract

We analyze public investment in basic research in a multi-country, multi-industry environment with international trade. In our economy, basic research generates ideas which private firms take up in applied research to develop new varieties. Such development requires industry-specific know-how. 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.

Keywords: applied research, basic research, economic growth, international trade, knowledge spillover, optimal policy

JEL Classification: F10, F43, H40, O31, O38

Suggested Citation

Gersbach, Hans and Schetter, Ulrich and Schmassmann, Samuel, From Local to Global: A Unified Theory of Public Basic Research (December 17, 2018). University of St. Gallen, SEPS Discussion Paper 2018-16. Available at SSRN: https://ssrn.com/abstract=3303825 or http://dx.doi.org/10.2139/ssrn.3303825

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ulrich Schetter (Contact Author)

Harvard University - Center for International Development (CID) ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Samuel Schmassmann

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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