Companies and governments all around the globe make extraordinary efforts to generate, improve and enhance technology. Several multinational corporations each spend over $3 billion annually on research and development (R&D). In fact, according to Dodgson and Bessant (1996), the seven of the largest Organization for Economic Co-operation and Development (OECD) countries1 collectively spend over $300 billion every year on R&D…
"In addition to the industrial policies that governments pursue in line with their political philosophies and models of economic growth, some governments develop public policies with varying degrees of explicitness, intended to encourage innovation" (Dodgson and Bessant 1996, p.23).
To illustrate the role of government in the process of innovation, Shonfield (1981) postulated as his point of entry that public policy-makers need not, or more strongly should not, be concerned with economic innovation, and the to ask what conditions have to be fulfilled by market processes to secure an optimum outcome. This was his first step in his argument: even if it could be shown that the market process was deficient, it would not follow that intervention by public authorities would produce a better answer. Shonfield goes on saying that if markets were to go on their own without intervention from the government as to how they would manage the scientific environment, markets should be able to provide innovators the necessary environment for them to carry their work. This would include the necessary perks to encourage people to innovate.
As discussed by Shonfield (1981, p.4), another problem is the measurement: calculating social preference. Social preference here means which projects the society wants to prioritize and those types of innovations that the society wants to set aside for the moment This is partly because market signals are necessarily limited to expressing the preferences of contemporaries. Shonfield's third requirement is that markets must be able to regulate the effects of economic innovation on public goods.
On the other hand, Branscomb and Florida (1999) cited the importance of the government's role in support of science and technology on regulating the two kinds of so-called "spillovers." "Knowledge spillovers (italics mine) derive from the public good nature of knowledge, combined with the difficulty of keeping economically useful knowledge secret when it is profitably exploited. Such spillovers can be derived from reverse engineering, when some aspects of a competitor's technology may be discovered by examining how the product is made. Even negative information, the abandonment of a line of work by a respected competitor, for example, can be a useful spillover of his decision" (Branscomb and Florida 1999, p. 30).
Branscomb and Florida's second type of spillover is the consumer surplus spillover, which results from the creation of new goods or the improvement of existing ones. "The innovator captures only part of the consumer value in the sales price; there may be a social surplus that exceeds the innovator's profit. Research tends to generate more knowledge spillovers, which is a reason for government support, but research, by itself, cannot generate more knowledge spillovers. Private firms have inadequate incentives (to varying degrees, depending on market structure and other considerations) to take new ideas to market. Furthermore, the transfer of potential useful ideas from the government or university ...
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