policymakers demonstrate

66 Philippe Aghion and Ufuk Akcigit
the short-run budgetary targets should be relaxed so as to allow this country to
maintain its growth enhancing investments. However, while the fiscal compact
specifies long-term objectives that are stated in structural terms, the short and
medium term targets agreed between the European Commission and member
states last year, are in nominal terms. This inconsistency is damaging to growth.
1.9 Conclusion
In this chapter we have tried to show how theoretical models of growth and
innovation can deliver testable predictions and also policy recommendations.
Our emphasis has been on the Schumpeterian approach where each innovation
not only induces positive knowledge spillovers on subsequent research but also
destroys rents from previous innovations.
Where do we see the research on R&D, innovation and growth being pushed
over the next years? A first direction is to look more closely at how growth and
innovation are affected by the organization of firms and research. Thus over
the past five years Nick Bloom and John Van Reenen have popularized fascinating
new datasets that allow us to look at how various types of organizations
(e.g., more or less decentralized firms) are more or less conducive to innovation.
But firms’ size and organization are in turn endogenous, and in particular
they depend upon factors such as the relative supply of skilled labour or the
nature of domestic institutions.
A second and related avenue for future research is to look in more
detail at innovation-led growth, firm dynamics and reallocation in developing
economies. Recent empirical evidence (see Hsieh and Klenow, 2009, 2012)
has shown that misallocation of resources is a major source of productivity gap
across countries. What are the causes of misallocation, why do these countries
lack creative destruction which would eliminate the inefficient firms? Schumpeterian
theory with firm dynamics could be an invaluable source to shed light
on these important issues that lie at the core of the development puzzle.
A third avenue is to look at the role of finance in innovation-led growth.
Recent studies point at equity finance being more growth-enhancing in more
frontier economies. More generally, we still need to better understand how different
types of financial instruments map with different sources of growth and
different types of innovation activities. Also, we need to better understand why
we observe a surge of finance during the acceleration phase in the diffusion of
new technological waves, and also how financial sectors evolve when the waves
taper off.
A fourth avenue is to analyse in greater depth the relationship between innovation,
income inequality and social mobility, and to gather new data on individual
patenting and revenues to look at how taxation policy affects the flow