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

59 Pages Posted: 26 May 2021

See all articles by Ruchir Agarwal

Ruchir Agarwal

International Monetary Fund (IMF)

Patrick Gaule

University of Bath

Date Written: February 1, 2021

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 effort’: i.e. the elasticity of R&D effort with respect to market size is about ½ 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: F31, E26

Suggested Citation

Agarwal, Ruchir and Gaule, Patrick, What Drives Innovation? Lessons from COVID-19 R&D (February 1, 2021). IMF Working Paper No. 2021/048, Available at SSRN: https://ssrn.com/abstract=3852776

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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