Skip to content

Public knowledge, private know-how?

Via Alex Tabarrok at MR

… abstract public knowledge per se has very little effect on corporate patenting, publishing, or employment of scientists.

Our study highlights that the impact of public science on corporate innovation depends on its embodied components.

Indeed, firms’ response to the increase in public science depends on their proximity to the technology frontier. Frontier firms tend to continue investing in internal research and invention, even in the presence of abundant public science. This is consistent with the observed surge in corporate scientific research in such emerging technology fields as artificial intelligence and quantum computing.

The disparity in response may arise because frontier firms enjoy greater marginal returns from using internal research and invention than other firms, or because they operate in technologies where public invention is less abundant but human capital is nevertheless abundantly supplied. Consequently, frontier firms may benefit more from public knowledge and skilled PhDs to fuel their internal research and inventions than followers.

Our findings also relate to the growing literature on economic growth and productivity slowdown. The sluggish growth in productivity over the last three decades or more in the face of sustained growth in scientific output has puzzled observers. Our findings point to a possible reason. Romer (1990) and Jones (2022) stress that the non-rivalrous nature of ideas is a potent source of increasing returns and productivity growth. It should follow that the most powerful sources of increasing returns are ideas that are broadly usable, and whose production is publicly funded so that they can be placed in the public domain, available to all. This is the basic argument underlying the case for public support for scientific research in universities.

Yet the history of technical progress teaches us that abstract ideas are also difficult to use. Ideas have to be tailored for specific uses, and frequently, have to be embodied in people and artifacts before they can be absorbed by firms.

However, [the need for] such embodiment also makes ideas less potent sources of increasing returns, turning non-rival ideas into rival inputs, whose use by rivals is easier to restrict.

Our findings confirm that firms, especially those not on the technological frontier, appear to lack the absorptive capacity to use externally supplied ideas unless they are embodied in human capital or inventions. The limit on growth is not the creation of useful ideas but rather the rate at which those ideas can be embodied in human capital and inventions, and then allocated to firms to convert them into innovations.

In other words, productivity growth may have slowed down because the potential users— private corporations—lack the absorptive capacity to understand and use those ideas.

The loss of absorptive capacity is partly related to the growing specialization and division of innovative labor in the U.S. economy. Not only do universities and public research institutes produce the bulk of scientific knowledge, but over the past three decades, publicly funded inventions and startups have grown in importance as sources of innovation.

Concomitantly, many incumbent firms have substantially withdrawn from performing upstream scientific research. The withdrawal of many companies from upstream scientific research may have reduced their absorptive capacity—their ability to understand and use scientific advances produced by public science.

If so, the division of innovative labor between universities and firms, wherein the former produce knowledge and the latter apply the knowledge to invent, appears to work much better for frontier firms. Non-frontier firms instead require universities or startups to convert ideas into inventions. The growing specialization involving universities, startups, and incumbents may therefore pose a challenge to maintaining a diverse and vibrant innovation ecosystem. The expansion of public science may widen the gap between frontier firms and followers, with ramifications for product market competition, as well as for the rate and direction of technical progress.

Ashish Arora, Sharon Belenzon, Larisa C. Cioaca, Lia Sheer & Hansen Zhang – The Effect of Public Science on Corporate R&D

I'd love to hear your thoughts and recommended resources...