Public policy to promote Innovation

Noah Smith points to the new paper by Nick Bloom and Co on policies to promote innovation. In the context of the US, they explore the relative efficacy of various innovation policy levers - tax policies to favour R&D, government research grants, policies aimed at increasing the supply of human capital focused on innovation, intellectual property policies, and pro-competition policies. 

Their conclusion is in the form of table which they call "a toolkit for innovation policymakers",

In the short run, research and development tax credits and direct public funding seem the most effective, whereas increasing the supply of human capital (for example, through expanding university admissions in the areas of science, technology, engineering, and mathematics) is more effective in the long run. Encouraging skilled immigration has big effects even in the short run. Competition and open trade policies probably have benefits that are more modest for innovation, but they are cheap in financial terms and so also score highly. One difference is that R&D subsidies and open trade policies are likely to increase inequality, partly by increasing the demand for highly skilled labor and partly, in the case of trade, because some communities will endure the pain of trade adjustment and job loss. In contrast, increasing the supply of highly skilled labor is likely to reduce inequality by easing competition for scarce human capital.

The effect of immigration is very interesting

Immigrants make up 18 percent of the US labor force aged 25 and over but constitute 26 percent of the science, technology, engineering, and mathematics workforce. Immigrants also own 28 percent of higher-quality patents (as measured by those filed in patent offices of at least two countries) and hold 31 percent of all PhDs. A considerable body of research supports the idea that US immigrants, especially high-skilled immigrants, have boosted innovation. For example, Kerr and Lincoln (2010) exploit policy changes affecting the number of H1-B visas and argue that the positive effects come solely through the new migrants’ own innovation. Using state panel data from 1940 to 2000, Hunt and Gauthier-Loiselle (2010) document that a 1 percentage point increase in immigrant college graduates’ population share increases patents per capita by 9 to 18 percent, and they argue for a spillover effect to the rest of the population.

Their conclusion is to favour three policies - government funding, tax credits, and skilled immigration. Interesting how some of the staples of free-market ideology like intellectual property protection and pro-competition policies fall short on evidence of impact.