The CP solves the case – empirically it substantially increases innovation in the technology areas it targets

Volume 151, June 2023, //DH

“positive hysteresis” = “a permanent increase of the growth possibilities of the economy”

If and how innovation policies should be designed is one of the major challenges facing policy makers and societies at large. This work contributes to the ongoing debate extending the Schumpeter meeting Keynes agent-based model (Dosi et al., 2010) to assess the impact of different public innovation interventions on the short- and long-run performance of the economy, as well as on the public budget. More precisely, we have considered indirect innovation policies supporting the R&D activity and capital-good investment of private firms and direct intervention encompassing a public firm developing new technologies and freely diffusing them into the economy, as well as a National Research Laboratory (NRL) engaged in frontier research to discover radical innovations. The last two policies are akin to the interventions implemented by an Entrepreneurial State (Mazzucato, 2013).

Our results show that the most effective innovation policies involve the creation of public research bodies, which we label National Research Labs. Such a policy facilitate the discovery of radical innovations that enlarge the set of technological opportunities available to private firms, and trigger the emergence of positive hysteresis dynamics. The outcome is a higher growth potential of the economy and a lower unemployment rate while the public deficit is kept under control. Positive synergies can be activated combining the previous policy with the creation of a public firm developing new technologies and easing technological diffusion of state-of-the-art capital goods. Indirect innovation policies also increase economic growth while keeping the public budget under control. However, their impact is lower than the one of direct policies. Entrepreneurial-State policies comes with the risk of deteriorating public finances in those cases where the publicly-discovered technologies do not diffuse enough or large-scale and high-risk research projects seeking radical innovations fail. However, for the same amount of public resources allocated to market-based interventions, Entrepreneurial-State innovation policies deliver significantly better aggregate performances if the government is willing to patiently bear the intrinsic risks related to innovation. Finally, in line with the empirical evidence (Moretti, Steinwender, Van Reenen, 2019, Pallante, Russo, Roventini, et al., 2020), we find that innovation policies crowd-in private R&D investment, and such a result is stronger for direct innovation policies.

Overall, this paper supports the idea that public policies aimed at stimulating basic research improve the economic performance (see e.g., Akcigit, Hanley, Serrano-Velarde, 2020, Kantor, Whalley) and stimulate the private search for innovations (e.g. Rosenberg and Nelson, 1994). In contrast with Bloom et al. (2019), we show a clear economic rationale for mission-oriented research programs which strengthens both recent empirical evidence (Pallante et al., 2020) and the historical analysis of large government-led research programs (Gross, Sampat, 2020, Gross, Sampat, 2021, Kantor, Whalley). While mission-oriented policies are often criticized for the alleged inability of the government to select challenges and technologies, we find that innovation policies inspired by an Entrepreneurial State approach are valuable independently of the specific mission to be targeted. Though risky, they are way more effective than a number of alternatives at enlarging the pool of knowledge and the technological opportunities available to the economy as well as at facilitating their diffusion. This is beneficial and socially desirable per-se. Hence, given a societal challenge, our results hint that genuine Entrepreneurial State-like policies should patiently promote the discovery of radical innovations through broad and ambitious research-oriented programs, sustain the costs of eventual early failures, and ease knowledge diffusion through public-private interactions. Such a genuine Entrepreneurial State approach will further solve the apparent short term trade-offs between innovation policies and other forms of public spending.