Economic Conditions for Innovation: Private vs. Public Sector

Tom\'a\v{s} Evan and Vladim\'ir Hol\'y

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Abstract: The Hicks induced innovation hypothesis states that a price increase of a production factor is a spur to invention. We propose an alternative hypothesis restating that a spur to invention require not only an increase of one factor but also a decrease of at least one other factor to offset the companies' cost. We illustrate the need for our alternative hypothesis in a historical example of the industrial revolution in the United Kingdom. Furthermore, we econometrically evaluate both hypotheses in a case study of research and development (R&D) in 29 OECD countries from 2003 to 2017. Specifically, we investigate dependence of investments to R&D on economic environment represented by average wages and oil prices using panel regression. We find that our alternative hypothesis is supported for R&D funded and/or performed by business enterprises while the original Hicks hypothesis holds for R&D funded by the government and R&D performed by universities. Our results reflect that business sector is significantly influenced by market conditions, unlike the government and higher education sectors.

Date: 2020-04, Revised 2020-10
New Economics Papers: this item is included in nep-eff, nep-hme, nep-ore and nep-tid
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Published in Evan, T. & Hol\'y, V. (2021). Economic Conditions for Innovation: Private vs. Public Sector. Socio-Economic Planning Sciences, 76, 100966

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