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directly dampen productivity growth, and this question is addressed further
in Box 5-2.
Policies to Foster Productivity Growth and to
Help Ensure That Everyone Benefits from it
The benefits of technological progress do not accrue only to those who
develop new processes and inventions; they also spill over to the population
at large. For this reason, the U.S. Government has a role in supporting
and enabling technological development. This government role includes:
directly funding or providing incentives for research and development
(R&D); providing an institutional, legal, and regulatory environment that
protects competition, defines and supports intellectual property rights,
and thereby encourages private innovation; and developing human capital
through education, especially in scientific and technological fields. In addition,
the government has a role in ensuring that everyone benefits from
those technological advances.
Investments in R&D often have “spillover” effects; that is, a part of
the returns to the investment accrue to parties other than the investor. As a
result, investments that are worth making for society at large might not be
profitable for any one firm, leaving aggregate R&D investment below the
socially optimal level (for example, Nelson 1959). This tendency toward
underinvestment creates a role for research that is performed or funded by
the government as well as by nonprofit organizations such as universities.
These positive spillovers can be particularly large for basic scientific
research. Discoveries made through basic research are often of great social
value because of their broad applicability, but are of little value to any individual
private firm, which would likely have few, if any, profitable applications
for them. The empirical analyses of Jones and Williams (1998) and
Bloom et al. (2012) suggest that the optimal level of R&D investment is two
to four times the actual level. Akcigit et al. (2013) also find underinvestment
in basic research (although, contrary to the bulk of the literature, they find
overinvestment in applied research), and suggest policies that are specifically
targeted at basic research.
Consistent with the presence of large spillover benefits, most basic
research in the United States is funded by the government and other
nonprofit entities. As Figure 5-4 shows, over half comes from government
sources, and less than one-quarter comes from private industry. However,
expenditures on basic research are only a fraction of total R&D expenditures,
as seen in Figure 5-5, and the private-sector share of funding for applied
research and development is much higher than it is for basic research.
Fostering Productivity Growth | 193