Encourage Innovation, Increase Investment: Excerpts from Six Chapters of 創新經濟學 (Innovation Economics)

It is again time for presidential candidates’ advisers to study seriously and put forward policies. Robin believes: “Encourage innovation, increase investment, and save Taiwan.” --- Every chapter in this book emphasizes that both the ways innovation is produced and the ways it has an impact are undergoing important changes. Policy’s role in that process is changing too. Drawing on important findings and insights from recent research, several chapters examine the relationship between innovation and immigration, the roles of firms and universities in innovation, and differences in innovation across geographic regions. This innovation divide is increasingly difficult to ignore. Two chapters focus directly on policy. One examines how policy affects incentives for innovation in pharmaceuticals; the other explores the changing debate over innovation and antitrust policy. Finally, another contribution emphasizes the potential role of experiments in analyzing innovation policy. As with other published volumes in this series, our aim is to draw lessons from recent economics and related research for policy analysis and future research. William Kerr’s first chapter brings together findings from his recent book, The Gift of Global Talent: How Migration Shapes Business, Economy and Society. Focusing on outstanding researchers, technological inventors, and knowledge workers more broadly, Kerr demonstrates the exceptional contribution of highly skilled immigrants to innovation. Drawing on a rapidly growing body of empirical research, he finds that nearly a quarter of patented inventions have at least one inventor with foreign citizenship; immigrants account for nearly 18% of all inventors in the United States. The immigrant share rises at higher levels of achievement—for example, from university graduates to Nobel laureates—and men and women are represented in roughly equal proportions among immigrant talent. Kerr analyzes what motivates migration and drives the global competition for talent. Although the United States has long benefited from international talent flows, highly skilled immigration has now become a global phenomenon. Opposition to immigration has also grown in the United States, while inefficiencies in its system for attracting global talent remain unresolved. By contrast, countries such as Canada and Australia are actively implementing policies and programs to recruit highly skilled immigrants. Kerr highlights a key difference between the United States and many other jurisdictions in the competition for global talent. The United States relies largely on employment-based visas to select highly skilled immigrants, most notably the H-1B program. Many other countries use points-based systems that rank applicants by skills and background. Employment-based visas have the advantage of responding more readily to changing market demand and reducing unemployment among highly skilled immigrants. But they also weaken employees’ bargaining power, because remaining employed is the basis for retaining immigration status, and constrain their ability to join startups or become founders. Applications are also concentrated in a small number of firms, with information-technology outsourcing companies accounting for a growing share. Overall, Kerr emphasizes the important role of highly skilled immigrants in driving innovation and growth in knowledge-intensive industries. Specific policies and institutions can also have an outsized influence in connecting global talent flows with innovation outcomes. The second chapter, by Ashish Arora, Sharon Belenzon, Andrea Patacconi, and Jungkyu Suh, looks more closely at the sources of innovation, particularly the evolving division of innovative labor. Their research shows major changes over time in how universities and firms interact in innovation. Although U.S. R&D spending as a share of GDP has remained relatively stable over the long term, the way R&D is conducted has changed substantially. Universities now account for a growing share of research, while firms increasingly concentrate on development. Research, for example, has fallen from more than 35% of corporate R&D in the late 1950s to below 20% today. This trend is not merely an issue of R&D accounting. As universities and firms specialize further in different innovative activities, firms publish relatively fewer scientific papers and rely more heavily on external knowledge. The shift changes firms’ incentives to innovate—for example, a stronger focus on core businesses weakens their incentive to expand basic research—and also changes the policy environment. In this new innovation ecosystem, two pathways to commercializing research are particularly important. One is greater reliance on technology licensing from universities, an explicit objective of the Bayh–Dole Act. The other is a larger role for technology-oriented startups that bridge universities and firms in markets for technology. Perhaps most importantly, both quantitative and qualitative evidence suggest that this division of innovative labor may not be delivering its intended benefits: specialization combined with effective technology transfer. This may be related to declining overall R&D productivity. The corporate-laboratory era may have lost ground, but we have yet to develop policies and mechanisms that enable the new ecosystem to make an economic contribution comparable to its predecessor’s. Margaret Kyle examines the pharmaceutical industry to analyze the relationships among innovation systems, innovation policy, and social welfare. U.S. pharmaceutical spending is approximately US$1,200 per person, and medicines account for more than 20% of total health-insurance spending in many countries. Kyle emphasizes that overall innovation in this critical field benefits from multiple policies: those that create new technological opportunities, or push policies, and those that provide incentives to turn such opportunities into marketable products, or pull policies. For both types of policy, the United States has played a leading, though not exclusive, role in building a comprehensive innovation system. On the push side, its postwar biomedical research system provides an institutional framework for developing scientific knowledge that may eventually eliminate diseases. These may affect a large share of the population or have a major impact on a small patient group, as with conditions requiring orphan drugs. This well-known postwar system has evolved with funding from the National Institutes of Health (NIH). Pharmaceuticals have attracted not only broad conceptual discussion but also extensive rigorous empirical research. That research indicates that NIH funding has generally contributed positively to biomedical innovation and to complementarities between public and private investment in the field. On the pull side, formal intellectual property rights, particularly patents, are the principal policy instrument. Extensive evidence supports their central role in creating incentives for pharmaceutical innovation. Every intellectual-property system involves inherent trade-offs, such as balancing exclusivity and sharing. But pharmaceuticals have distinctive features that deserve particular attention, including the persistent problem of patent evergreening: firms substantially extend a drug’s exclusivity through successive, incremental innovations. Prizes provide a complementary pull mechanism that has attracted considerable attention over the past twenty years, especially in the context of drug development. Finally, push and pull policies interact with other policies, often in subtle ways that have become the subject of extensive empirical research. These include market-entry regulation, product liability, and price controls. Although the overall assessment indicates broad alignment between pharmaceutical innovation policy and social welfare, concentrating on possible misalignments in important areas—particularly intellectual property and prizes—could provide a useful starting point for future policymaking. The fourth chapter, by Giulio Federico, Fiona Morton, and Carl Shapiro, continues to examine policy’s effect on overall incentives to innovate. It focuses on antitrust, explaining how competition policy can strengthen innovation incentives and productivity, and how it relates to traditional antitrust analysis, which pays greater attention to price effects. The authors’ central theme is that innovation often accompanies intense competition. Innovation is best supported when incumbents can exploit their comparative advantages while facing competitive pressure, both from traditional, price-oriented rivals and from new challengers that introduce technologies or open up new customer segments. Drawing on case studies and more systematic empirical research, the authors synthesize a wide literature on the interaction between horizontal mergers and innovation, alongside a detailed assessment of exclusionary conduct by dominant firms. A key theme in their assessment of horizontal mergers and innovation is that the so-called inverted-U relationship between competition and innovation does not justify allowing horizontal mergers without restraint. Instead, they argue that assessments should rest on structural factors in the specific case: possible overlaps between existing and potential products, categorized as product-to-pipeline and pipeline-to-pipeline overlaps, and the distribution of innovative capabilities among industry participants. Alongside their detailed treatment of dominant firms’ exclusionary conduct, their analysis suggests that active, case-specific competition-policy measures may strengthen innovation. Chapter Five draws a more general question from specific policy issues: what role can experiments play in understanding innovation policy? Its author, Albert Bravo-Biosca, draws on his work at the Innovation Growth Lab (IGL) within the United Kingdom’s National Endowment for Science, Technology and the Arts (NESTA). He begins with a simple but striking observation: very few local economic-policy programs—fewer than 5%—have been credibly evaluated, and fewer than 0.5% of all relevant programs have demonstrated positive policy effects. Although government policies are often implemented as established best practice, for most innovation interventions neither government nor any particular institution currently has sufficient evidence to identify best practices rigorously and reliably. Bravo-Biosca offers a constructive framework for different types of innovation-policy experiments, encompassing more exploratory research, more specific impact studies, and research into best practices. As policymakers move beyond a basic understanding of key issues and bottlenecks toward evaluating particular programs, prospective randomized experiments become more necessary. These gold-standard tests may be most useful when evaluating a specific project or program whose broad context is already understood. The chapter reviews evidence from projects conducted by researchers working with the Innovation Growth Lab. Their evaluations consider how to encourage ideas, foster collaboration among researchers, and support fledgling small businesses. Launching a systematic experiment presents substantial obstacles, but the lab’s experience shows that deliberately encouraging experimentation can greatly benefit the design and analysis of innovation policy. In the final chapter, Chapter Six, Edward Glaeser and Naomi Hausman pose a broader question: how can innovation policy address severe unemployment and a lack of economic and social opportunity in disadvantaged places? They first demonstrate substantial regional inequality in innovation and economic opportunities, alongside a spatial mismatch between innovation and unemployment. The geography of innovation is broadly associated with economic opportunity, rooted in the underlying factors that promote innovation clusters. Moreover, declining geographic mobility among innovators, combined with greater geographic concentration of innovation, will over time intensify the spatial mismatch between innovation and unemployment. Given this disconnect, the chapter studies how a range of innovation-policy instruments might affect it. The authors suggest shifting the focus of innovation efforts through push and pull policies, encouraging innovations that could increase economic and social opportunities in disadvantaged places rather than concentrating on strengthening those places’ own innovative capacity. Other possibilities include geographically targeted skilled-immigration policies, substantial local investment in human-capital development, nurturing growth-oriented entrepreneurship, and promoting the commercialization of university inventions. Innovation clusters offer large returns, while innovators face structural barriers to relocating to disadvantaged places. One potentially effective response to persistent unemployment and mobility challenges may therefore be to encourage innovations that expand economic and social opportunities in those places. Overall, the book’s six chapters examine key areas of current research on innovation policy.