What Drives Innovation? Lessons from Covid-19 R&D

56 Pages Posted: 1 Feb 2021

See all articles by Ruchir Agarwal

Ruchir Agarwal

International Monetary Fund (IMF)

Patrick Gaule

University of Bath

Abstract

To examine the drivers of innovation, this paper studies the global R&D effort to fight the deadliest diseases and presents four results. We find: (1) global pharmaceutical R&D activity—measured by clinical trials—typically follows the 'law of diminishing efforts': i.e. the elasticity of R&D effort with respect to market size is about 1/2 in the cross-section of diseases; (2) the R&D response to COVID-19 has been a major exception to this law, with the number of COVID-19 trials being 7 to 20 times greater than that implied by its market size; (3) the aggregate short-term elasticity of science and innovation can be very large, as demonstrated by aggregate flow of clinical trials increasing by 38% in 2020, with limited crowding out of trials for non-COVID diseases; and (4) public institutions and government-led incentives were a key driver of the COVID-19 R&D effort—with public research institutions accounting for 70 percent of all COVID-19 clinical trials globally and being 10 percentage points more likely to conduct a COVID-19 trial relative to private firms. Overall, while economists are naturally in favor of market size as a driving force for innovation (i.e."if the market size is sufficiently large then innovation will happen"), our work suggests that scaling up global innovation may require a broader perspective on the drivers of innovation—including early-stage incentives, non-monetary incentives, and public institutions.

JEL Classification: O31, O38, J24

Suggested Citation

Agarwal, Ruchir and Gaule, Patrick, What Drives Innovation? Lessons from Covid-19 R&D. IZA Discussion Paper No. 14079, Available at SSRN: https://ssrn.com/abstract=3775984

Ruchir Agarwal (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Patrick Gaule

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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