R&D Is Local, Global, But Not National

A recent Post article by Brad Plumer illustrates what is wrong with the usual research funding arguments:

One of the few things Republicans and Democrats have been able to agree on in recent years is that the government should be spending more on basic scientific research … Thanks to budget pressures and the looming sequester cuts, federal R&D spending is set to stagnate in the coming decade. …

As a result, scientists and other technology analysts are warning that the United States could soon lose its edge in scientific research — and that the private sector won’t necessarily be able to pick up the slack. “If you look at total R&D growth, including the corporate and government side, the U.S. is now at the low end … We’re seeing other countries, from Germany to Korea to China, make much bigger bets.” …

There’s a long, long list of world-changing innovations that can be traced back to federally funded R&D over the years. .. The key question here is how much of this innovation might have happened without government involvement. … Many economists agree that private companies tend to under-invest in very basic scientific research, since it’s hard for one firm to reap the full benefits from those discoveries. …

When the Congressional Budget Office reviewed the evidence in 2007, it concluded that government-funded basic research generated “substantially positive returns.” And it found that, on the whole, government R&D helped spur additional private-sector R&D rather than displace it. … The United States will soon spend less on all types of R&D as a percentage of its economy in the coming decade than countries like Australia and South Korea …

The sanguine view is that other countries are tossing more money at scientific research that will have positive spillover benefits for the entire world — including us. If China invents a cure for cancer, we all benefit. Others worry, however, that the U.S. economy could suffer from the fact that a greater share of research is happening elsewhere. (more)

Note the conflicting arguments: each small part of the world invests too little in R&D, because other parts gain without paying, but the US should fear falling behind nations that invest more. These two only makes sense together if the nation is the natural scale for innovation – innovations mostly leak away from their source within a nation, but mostly stay within each nation. The academic literature, however, suggests the natural scales are global and local – while there are gains to the world as a whole, gains are focused on related industries in the local area:

A recent body of empirical evidence clearly suggests that R&D and other sources of knowledge not only generate externalities, but such knowledge spillovers tend to be geographically bounded within the region where the new economic knowledge was created (Griliches 1992). That is, new economic knowledge may spill over, but the geographic extent of such knowledge spillovers is limited. … greater geographic concentration of production actually leads to more, and not less, dispersion of innovative activity. (more; see also and also)

While it would be great if the world could coordinate to promote R&D spending worldwide, there is little economic justification for forcing Wyoming and Louisiana, who spend 0.4% and 0.56% of GDP respectively on R&D, to pay for R&D spending in Massachusetts and New Mexico, where those figures are 5.49% and 7.65% (source), any more than the rest of the world pays for such spending. If the US government funds less R&D, it will be mainly states like Massachusetts and New Mexico that suffer, not states like Wyoming and Louisiana, relative to the rest of the world.

If R&D spending mostly helps the particular regions in which it happens, why do we pay for it at the national level? Probably because many see it as a national prestige good – people in Wyoming look good to foreigners by being in a nation where lots of impressive research happens in Massachusetts. Are they right, or is Massachusetts just getting a nice juicy transfer?