Centre for Economic Performance (CEP)


Drivers of Innovation


Recent work on Drivers of Innovation

Economists and many other commentators agree that technological innovation must be at the heart of long-run growth and that understanding the factors which drive innovation is of crucial importance. It is also widely understood that left to itself the market is unlikely to provide enough incentives for innovation. This is because only a small proportion of the benefits of invention are captured by the firm or individual who spends money and time on research. Most of the benefits of invention 'spill over' to other firms who can copy the new idea without having to pay the upfront research costs. Therefore, studying how public policies may stimulate innovation has been a major research theme at the CEP.

Here we summarise our work on the following key areas:

- Competition, Spillovers and Innovation

- Intellectual Property Rights

- Universities and Incentives for Innovation

- Firm Ownership and Innovation

- Multinationals and Innovation

- R&D Tax Credits

- Government Spending on R&D

  • Competition, Spillovers and Innovation

    Competition in product markets is a vital way in which productivity and welfare are improved in market economies. A key question addressed in our research is how product market competition and technology spillovers affect innovation.

    Competition and Innovation A paper by Philippe Aghion and co-authors (2003) develops a growth model in which competition may increase the incremental profit from innovating; on the other hand, competition may also reduce innovation incentives for laggards. They provide empirical support for their model using data on UK firms' patenting activity at the US patent office.

    Further reading:
    Competition and Innovation: An Inverted U Relationship

    Spillovers and Rivalry

    Nick Bloom, Mark Schankerman and John Van Reenen examine the effects on a firm of its rival engaging in R&D. There are two effects: first the rivals' innovations can help by creating useful new ideas ('knowledge spillovers'). Secondly the rivals' innovations can harm by stealing market share from the first firm. They develop theoretical foundations and conduct focused empirical analysis on US firms showing that both factors matter, on average the beneficial effects dominate. Consequently R&D will still tend to be under-supplied in the free market.

    Further reading:
    Identifying Technology Spillovers and Product Market Rivalry - this subsequently been published in Econometrica, 2013.

    We have also investigated some high tech industries in detail to see how our models perform in a sector where we can specify the mechanisms and models in greater detail. One such industry is computer hardware and software which has been at the centre of many competition policy debates, such as the Microsoft cases.

    Further reading:
    Is There a Market for Work Group Servers? Evaluating Market Level Demand Elasticities. Using Micro and Macro Models

    The Growth of Network Computing: Quality Adjusted Price Changes for Network Servers

    Interoperability and Market Foreclosure In the European Microsoft Case - a non-technical discussion of the outcome of the Microsoft case

    Geographic spillovers

    Knowledge spillovers tend to be higher when firms are closer. In further analysis using the methods of Bloom, Schankerman and Van Reenen, Sergey Lychagin and co-authors have examined different measures of closeness: geographic, technology and product market proximity. They find that geographic and technological proximity matter more than product market proximity.

    Further reading:
    Spillovers in Space: Does Geography Matter?

    Rachel Griffith, Sokbae Lee and John Van Reenen (2007) have also shown that being geographically close matters less for knowledge spillovers over time, as we would expect with falling communications and travel costs.

    Further reading:
    Is Distance Dying at Last? Falling Home Bias in Fixed Effects Models of Patent Citations - published in Quantitative Economics, 2011.

    Government to business R&D spillovers

    Enrico Moretti, Claudia Steinwender and John Van Reenen (2014) examine the impact of government funding for R&D on privately performed R&D and its ultimate effect on productivity growth. To deal with the potential endogeneity of where governments choose to allocate R&D funds, they use changes across countries and industries in defence R&D spending. They uncover strong evidence of 'crowding in' rather than 'crowding out', as increases in government funded R&D result in significant increases in private sector R&D.

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  • Intellectual Property Rights

    Do patent rights facilitate or impede follow-on innovation?

    Mark Schankerman and colleagues have built up an extensive body of work on intellectual property and innovation. In a recent paper, Alberto Galasso and Mark Schankerman (2014) study the causal effect of removing patent rights by court invalidation on subsequent research related to the focal patent, as measured by later citations. They find that patent invalidation leads to a 50 percent increase in citations to the focal patent, on average, but the impact is different across sectors. Patent rights block downstream innovation in computers, electronics and medical instruments, but not in drugs, chemicals or mechanical technologies. Moreover, the effect is entirely driven by invalidation of patents owned by large patentees that triggers more follow-on innovation by small firms.

    Further reading:
    Patents and Cumulative Innovation: Causal Evidence from the Courts

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  • Universities and incentives for innovation

    How to incentivise commercially valuable innovation? Universities are a key source of the new scientific knowledge that drives long-run economic growth. But what are the incentives for scientists to generate commercially valuable inventions and for university managers to transfer or license such technologies to the private sector? Mark Schankerman and colleagues explore these questions in a CentrePiece article which draws on some previous research carried out in the programme. They find that clear ownership rights, incentives and a clear definition of the objectives of technology transfer are key elements for promoting effective technology transfer. However, policy makers must remain vigilant to the danger of universities' over-emphasis of commercialisation which could threaten the established norms of 'open science' and redirect too much research away from basic science.

    Further reading:
    Harnessing success: incentives for invention and technology transfer in universities

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  • Firm Ownership and Innovation

    What is the relationship between institutional ownership and innovation?

    Philippe Aghion, John Van Reenen and Luigi Zingales find that greater institutional ownership is associated with more innovation, which they argue (using a number of techniques) is causal. They build a model where institutional owners increase managerial incentives to innovate by reducing the career risk of risky projects, and find support for this 'career concerns' view in the data.

    Further reading:
    Innovation and Institutional Ownership - this has subsequently been published in American Economic Review, 2013.

    How does business group structure affect innovation?

    We have created a large firm panel of innovation and productivity by merging the US and European Patent Office data with firm level accounting information. The European dataset is called AMAPAT. The first work using this AMAPAT database, by Sharon Belenzon and Tomer Berkovitz (2010) examines the role of business groups in affecting innovation; and finds that group affiliates are more innovative than standalones. It appears that this is due to group internal capital markets, rather than an explanation based on knowledge spillovers.

    Further reading:
    Innovation in Business Groups - this has subsequently been published in Management Science, 2010.

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  • Multinationals and Innovation

    Why do multinationals innovate more?

    Chiara Criscuolo, Jonathan Haskel and Matthew Slaughter find that multinationals innovate more, and that this is not simply because multinationals use more researchers, but also because they learn more from more sources such as suppliers and customers, universities, and their intra-firm worldwide pool of information.

    Further reading:
    Global Engagement and the Innovation Activities of Firms - published in the International Journal of Industrial Organization, 2010.

    Do UK firms benefit from investing overseas?

    Rachel Griffith, Rupert Harrison, and John Van Reenen find that investing overseas in R&D labs helps UK firms tap into foreign knowledge and improve home country productivity in the paper How Special is the Special Relationship? Using the Impact of U.S. R&D Spillovers on UK Firms As a Test of Technology Sourcing, published in the American Economic Review, 2006.

    The same findings appear when looking at German firms in What are the Channels for Technology Sourcing? Panel Data Evidence from German Companies, with Dietmar Harhoff and Elisabeth Mueller, published in Journal of Economics, Management and Strategy (2014) 23(1), 204- 224). This paper is able to delve into the sources in more detail and finds that co-operating with US suppliers appear to be important ways in which technology is diffused to German firms.

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  • R&D Tax Credits

    John Van Reenen (2011) gives an overview on the influential CEP work on R&D tax credits his 'Big Ideas' article, Innovation Policy. John Van Reenen and Rachel Griffiths compiled tax data with national R&D data and showed that tax credits did increase business R&D. Following that, Rachel Griffith, Stephen Redding and John Van Reenen created an econometric model for the whole of the OECD, which showed that R&D stimulated productivity growth through both imitation and innovation. This was combined with R&D tax information to show the significant net benefits were the UK to introduce tax credits. This work was picked up by policy makers, and R&D tax credits became part of Labour's 1997 manifesto.

    Further reading:
    Nicholas Bloom, Rachel Griffith and John Van Reenen (2002) 'Do R&D Tax Credits Work?', published in Journal of Public Economics 85: 1-31
    An earlier version - Do R&D Tax Credits Work? Evidence From An International Panel Of Countries 1979 - 1994 - is available to download.

    Rachel Griffith, Stephen Redding and John Van Reenen (2004) 'Mapping the Two Faces of R&D: Productivity Growth in a Panel of OECD Industries', published in Review of Economics and Statistics 86(4): 883-95. An earlier version of the paper is available to download.

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  • Government Spending on R&D

    In a US context, John Van Reenen and Richard Freeman (2009) consider the rationale for government spending on R&D, against the background of calls to increase such spending. They examine the impact of the 1998- 2003 doubling of the National Institutes of Health (NIH) budget on the bio-medical sciences. They find that this created substantial adjustment problems in the market for research and failed to address the long-standing problem of recruiting young people into science. In order to provide more incentive to the young they argue that more funding should be put towards early research careers since research simultaneously produces knowledge and adds to the human capital of researchers. This has has greater value for young as opposed to older scientists because of their longer future career life span.

    Further reading:
    What if Congress doubled R&D Spending on the Physical Sciences?

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