Direct innovation boosts productivity and GDP – even though failure is possible, on average mission oriented innovation creates large gains

Volume 151, June 2023, //DH

Simulation results show remarkable differences across innovation policy regimes. First, all innovation policies spur productivity and GDP growth, but to different degrees, while this is not the case for transfers to households. Second, the impact of direct innovation policies is larger vis-à-vis indirect ones and entails effects of positive hysteresis (Cerra, Fatás, Saxena, Dosi, Pereira, Roventini, Virgillito, 2018) putting GDP on higher growth trajectories. However, Entrepreneurial-State policies are risky: their positive impact tend to show up on longer time horizons as compared with indirect interventions, and they can fail to discover new technologies. Nonetheless, extensive Monte Carlo analyses show that, on average, direct innovation policies deliver higher productivity and GDP growth, while being less expensive in terms of net public resources, compared to “indirect” forms of intervention. The impact of Entrepreneurial-State interventions is stronger when they combine the presence a public firm with a National Research Laboratory. Conversely, indirect monetary incentives tend to be associated with some redundancy - that is transfer of resources to firms with little effect on the intensity of search. Finally, all innovation policies we consider crowd in private R&D investment (in line with Moretti et al., 2019 and Pallante et al., 2020), although direct interventions provide, again, the most bang for their buck. Accordingly, our results suggest that the type of tools utilised by a mission-oriented Entrepreneurial State (Mazzucato, 2013, Mazzucato, 2018, Mazzucato, 2021) are also more effective at meeting uncontroversial innovation policy goals of productivity and growth gains.

To sum up, our results indicate that innovation policies are highly effective. In particular, when public resources are concentrated on clear missions and Entrepreneurial-State interventions, they appear to deliver large gains in economic performance compared to policies based on monetary incentives. This should be taken into account by policy makers when designing vast policy plans such as the Next Generation EU to jump-start growth in economies hardly hit by the COVID-19 crisis.