What Drives Innovation? Lessons from COVID-19 R&D

Ruchir Agarwal and Patrick Gaulé

No 2021/048, IMF Working Papers from International Monetary Fund

Abstract: To examine the drivers of innovation, this paper studies the global R&D effort to fight the deadliest diseases and presents four results. We find: (1) global pharmaceutical R&D activity—measured by clinical trials—typically follows the ‘law of diminishing effort’: i.e. the elasticity of R&D effort with respect to market size is about ½ in the cross-section of diseases; (2) the R&D response to COVID-19 has been a major exception to this law, with the number of COVID-19 trials being 7 to 20 times greater than that implied by its market size; (3) the aggregate short-term elasticity of science and innovation can be very large, as demonstrated by aggregate flow of clinical trials increasing by 38% in 2020, with limited crowding out of trials for non-COVID diseases; and (4) public institutions and government-led incentives were a key driver of the COVID-19 R&D effort—with public research institutions accounting for 70 percent of all COVID-19 clinical trials globally and being 10 percentage points more likely to conduct a COVID-19 trial relative to private firms. Overall, while economists are naturally in favor of market size as a driving force for innovation (i.e.“if the market size is sufficiently large then innovation will happen”), our work suggests that scaling up global innovation may require a broader perspective on the drivers of innovation—including early-stage incentives, non-monetary incentives, and public institutions.

Keywords: COVID-19; Innovation; Market Size; Pharmaceutical Industry (search for similar items in EconPapers)
Pages: 58
Date: 2021-02-19
New Economics Papers: this item is included in nep-ino and nep-tid
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Citations: View citations in EconPapers (6)

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Journal Article: What drives innovation? Lessons from COVID-19 R&D (2022)
Working Paper: What Drives Innovation? Lessons from COVID-19 R&D (2021)
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