Public Research Funding and Private Innovation:
The Case of the Pharmaceutical Industry
Robert Book
The CNA Corporation,
Center for Naval Analysis
Tuesday, December 3, 2002 15:00-16:00,
Room 145, NIST North (820)
Gaithersburg
Tuesday, December 3, 2002 13:00-14:00,
Room 4550
Boulder
Abstract:
The United States has an extensive system of government funding of
basic research. The traditional rationale for this policy is that due
to inappropriability of research results, the private sector provides
suboptimal levels of basic research, and government subsidy will
correct this underprovision. In addition, it is likely that higher
levels of basic research stimulate higher levels of private applied
research by increasing the stock of scientific knowledge. It is
possible, however, that government-funded basic research "crowds
out" private basic research by reducing its private returns. This
may mitigate or even reverse the former effect, so that government
funding of basic research may stimulate less, and in the extreme case
may even reduce the level of private research relative to the
alternative in which basic research is privately funded.
In this talk we use data on public and private funding of biomedical
research to study the effect of government research funding on
private-sector research and development (RD) expenditures and new
product development in the pharmaceutical industry. The main finding
is that increases in government research funding appear to crowd out
private (RD) for approximately the first four years and start to stimulate private research in the fifth year after the increase. A
reasonable interpretation is that the direct effect of government
funding is to crowd out private basic research in the short run and
stimulate private applied research in the long run. The crowding out
(substitution) is more pronounced when expenditure levels are measured
in constant dollars according to the Biomedical Research and
Development Price Index (BRDPI), rather than in current dollars or
constant dollars according to the GDP deflator. Numerous robustness
checks fail to support alternative interpretations, and anecdotal data
from the development of a new class of drugs (COX-2 inhibitors)
supports this interpretation. In addition, empirical results fail to
show any clear effect of government funding on output in the
pharmaceutical industry.
Contact: A. J. KearsleyNote: Visitors from outside NIST must contact
Robin Bickel; (301) 975-3668;
at least 24 hours in advance.
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