Externalities, R&D and Public Policy

Amol Agrawal, author of the blog Mostly Economics, linked to a very interesting article from CEPR recently:

How knowledge spillovers operate between academia and private firms remains an open question. This column exploits the Laboratoire d’Excellence, or LabEx, a large-scale funding programme of public research in France implemented in 2010–2011, to understand the spillover process. The authors find strong spillovers through the contracting channel, the mobility channel, and the informal channel, with the contracting channel playing the central role. As financing public research is an indirect way to spur private sector activity, comparing it with more direct instruments would be interesting.


That publicly funded research and development is a good thing is something I’ve spoken about on this blog before, and I’ve also written about how it could (potentially) be made better. I’ve also written about the fact that India needs to up its spending on publicly funded R&D. But all that, eventually, does beg a rather obvious and important question: how?

That is, imagine that you are the newly appointed czar in charge of deciding how and where a lot of money is to be spent on R&D in India. What you say goes, and you would (naturally) like to make sure you get the maximal bang for your buck. Which states will get more money, and which states will get less? Which geographical clusters within these states will you prioritize and why? Which industries will you focus upon, and why?

These are not easy questions to answer, far from it. There will be economics, politics, geopolitics, sociology, finance, history and geography-based aspects to consider, and there may well be other nuances to this question. Today’s post is about a very simple, specific question, which the authors of the piece that Amol linked to focus upon:

Once there has been some knowledge that has been gleaned, or developed, as a consequence of spending on R&D, how to ensure maximal spillovers into private firms? And even more specifically, through which specific channels will these spillovers be conducted?

Let’s put that into simple English: a university has developed knowledge that is of use to industry. How will this knowledge reach industry? The authors of this piece highlight three different ways (there are others):

  1. The contracting channel: there is direct, explicit cooperation between the academic institution and the private parties. This could involve “subcontracting research by private firms, contracts signed for PhD supervision or for joint research projects”.
  2. The mobility channel: Researchers who worked on the knowledge project in academia could move to the private firm.
  3. The informal channel: events, dinners, conferences etc.

The research mentions that the contracting channel was the most dominant:

We find evidence that firms more exposed to the shock start more PhD co-supervisions with public labs (panel a) and increase their outsourcing to the public research sector (panel b). Both these effects are consistent with the contracting channel being at play. We also find that researchers are more likely to move to the more exposed firms (panel c) and that these firms are more likely to hire fresh PhDs (panel d), evidence of the mobility channels. All channels thus seem at play, but the reports written by the funded units suggest a central role played by the contracting channel.


But that, of course, was for France. What might the story be like in India? A simple search on Google Scholar and Elicit.org didn’t throw up much that was useful and of recent vintage, but if any of you have any academic references that might be of help, please do send them my way.

In my personal experience, though, as someone who has worked in academia and industry when it comes to analytics, I would say that the mobility channel is by far and away the most dominant. While the contracting channel grows a little bit every year, it is nowhere near enough. And don’t get me started about the under-utilization of the mobility channel – while there is some movement of some faculty members, it can (and should) be a lot more, and in a variety of ways, not just a full time switching of careers.

The development of knowledge clusters, and the free (two-way!) flow of both people and knowledge between academia and industry needs to dramatically increase, and this increase needs to happen with every passing year. Funding R&D is one thing, but this – the exchange of people and ideas – is a relatively low-cost intervention with only upsides.

We should be making this happen!