Friday, September 27, 2013

27/9/2013: Incumbent Subsidies v Innovation: US evidence on R&D subsidies

I wrote about R&D tax credits before and the fact that some recent research has been throwing a spanner in the works of the Governments around the world actively subsidising R&D and innovation. You can read my musings on the subject here:

New research on the same just out from the Bank of Finland.

"Innovation, Reallocation and Growth" is a paper recently published by the Bank of Finland (Discussion Papers 22, 2013 authored by Daron Acemoglu, Ufuk Akcigit, Nicholas Bloom and William Kerr.

From the abstract (emphasis mine):

"We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good Öt to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates."

"We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms."

"On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry."

Or put differently, let the creative destruction work. Or even incentivise the creative destruction working (not my preference, though)...

1 comment:

Brian O' Hanlon said...

Constantin, What gets me most of all (and I can't call myself an old guy as yet), is innovative companies like Blackberry, Nokia, Dell etc,... how fast the 'maturity' rates, or how short the cycle times for these kinds of companies are. Even in things like operating systems, things like Ubuntu which seemed fresh and new not so long ago, maybe in the shadow of Android OS today. The time in the sunshine for many big, big names is brief indeed.

Even in books about Lean Manufacture, The Machine that Changed the World, etc from the early 1990s, they noted how plants in the United States used to get decades nearly out of one production line, one design. By the early 1990s, they can began to figure out how the Japanese had learned how to use shorter runs of changing designs, and still make money on it.

Larry Ellison is quoted from a while back, saying that innovation had slowed down. The internet was the last 'big' revolution. But given that even, it seems that there is plenty of scope left out there for creative destruction. It doesn't need any help at all.

That is the kind of research that I am always interested by. The kind, which examines the ample amounts of evidence and data out there, that creative destruction is present and operating as good as ever. But maybe, yeah, the counter argument is also valid in certain circumstances.

In my own field in construction, I feel that we are catching up at the moment in some aspects, to what manufacture and so on, had gone through decades back. Although there isn't a one-to-one transfer, between manufacture and construction. But definitely, in a laggard industry such as construction, the pace of cycles has quickened up a lot. A lot of old 'new ideas', get older really fast, and get thrown out for new 'new ideas'.

And I can tell you, this gets to be annoying after one has been through two or three of those cycles, from the workers point of view. As the saying often goes, I can't wake up tomorrow and find I am out of,... but this is what we are discovering more and more, and more now even in things like construction (and for reasons other than just the economic collapse too, and more to do with creative destruction).