Economics at your fingertips  

Repairing the R&D market failure: Public R&D subsidy and the composition of private R&D

Joonhwan Choi and Jaegul Lee

Research Policy, 2017, vol. 46, issue 8, 1465-1478

Abstract: We examine the role of government subsidy in addressing market failure in research and development (R&D). Prior studies have shown that allocating market resources for R&D is not socially optimal due to the expected market failure in private R&D investment. Using Korean pharmaceutical industry data, we analyze the relationship between public R&D subsidy and private R&D investment. We also investigate the impact that public R&D subsidy has on the composition of private R&D expenditures. We find that the government’s R&D subsidy stimulates rather than crowds out private R&D activities of small biotechnology venture firms. This finding provides additional empirical evidence that government R&D subsidy can successfully address market failure in private R&D investment. Yet, the empirical evidence that the R&D subsidy program stimulated the biotechnology venture firms to expand their new product R&D activities is found to be rather weak. Consequently, the idea that the Korean government’s R&D subsidy program successfully addressed the underinvestment in R&D below the socially optimal level by inducing small venture firms to expand their R&D activities in new product R&D areas is only partially supported. Limitations of this study, the extent to which the test results can be generalized in other industries, qualitative assessments in a broader context, and areas for further study are also discussed.

Keywords: R&D subsidy; Composition of R&D; Crowding-out effects; Pharmaceutical industry (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Research Policy is currently edited by M. Bell, B. Martin, W.E. Steinmueller, A. Arora, M. Callon, M. Kenney, S. Kuhlmann, Keun Lee and F. Murray

More articles in Research Policy from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-03-30
Handle: RePEc:eee:respol:v:46:y:2017:i:8:p:1465-1478