Innovation Policy and the Economy: Introduction to Volume 19

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Previous articleNext article FreeInnovation Policy and the Economy: Introduction to Volume 19Josh Lerner and Scott SternJosh LernerHarvard University and NBER Search for more articles by this author and Scott SternMassachusetts Institute of Technology and NBER Search for more articles by this author Harvard University and NBERMassachusetts Institute of Technology and NBERPDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinked InRedditEmailQR Code SectionsMoreThis volume is the nineteenth annual volume of the National Bureau of Economic Research (NBER) Innovation Policy and the Economy (IPE) group. The IPE group seeks to provide an accessible forum to bring the work of leading academic researchers to an audience of policymakers and those interested in the interaction between public policy and innovation. Our goals are:• to provide an ongoing forum for the presentation of research on the impact of public policy on the innovative process;• to stimulate such research by exposing potentially interested researchers to the issues that policymakers consider important; and• to increase the awareness of policymakers (and the public policy community more generally) concerning contemporary research in economics and the other social sciences that usefully informs the evaluation of current or prospective proposals relating to innovation policy.This volume contains revised versions of the papers presented at the group’s meeting in Washington, DC, in April 2018. In this nineteenth volume of this series, the chapters highlight the increasingly important, and complicated, interplay between innovation, international trade, and artificial intelligence technologies, as well as offer new frameworks for evaluating the role of innovation policy and innovation management approaches in areas such as life sciences and energy. As in previous volumes, our aim has been to draw out the lessons of recent research in economics and related fields for policy analysis and future research.The first chapter, by Lee Branstetter, Britta Glennon, and J. Bradford Jensen, documents the dramatic globalization of research and development (R&D), noting that this phenomenon is driven largely by research in the information technology (IT) domain. The authors give strong evidence that this was largely a result of US-based multinationals realizing the growing importance of IT to innovation and then looking to emerging regions—notably China, India, and Israel—for additional skilled IT-related talent. These new “hubs” each offer unique conditions fostering particular types of R&D growth. China offers large-scale access to talented workers who also can help facilitate the adaptation of US products for Asian markets. India offers low-cost access to a large base of talent, often as part of larger projects. Israel’s policies that steered many of their brightest into the computer science field created a dense cluster of individuals who also often had close ties to the United States. Interestingly, the authors suggest that the globalization of R&D has actually facilitated the ability of US multinationals to remain at the global technology frontier.Pian Shu and Claudia Steinwender then offer a complementary analysis of the impact of international trade and globalization, synthesizing a growing body of research evaluating the impact of trade shocks on innovation. Shu and Steinwender begin with a succinct and useful classification scheme to consider the relationship between trade shocks and innovation. On one dimension, they consider whether or not a shock affects input or output markets, and along a second dimension they consider whether the shock impacts foreign firms entering domestic markets, or vice versa. The authors then walk through this 2×2 framework by considering the economic forces shaping the impact of particular trade shocks. For example, in their discussion of new import competition, they consider three distinct forces: (1) the “Schumpeterian” effect, whereby firms facing a smaller potential market size elect to innovate less; (2) the “escape-competition” effect, whereby firms look to overtake their competitors via innovation; and (3) the “preferences” effect, whereby managers maximizing outcomes other than profits (e.g., prestige) may economize previously slack resources when facing new import competition. The framework offers a powerful lens to synthesize a wide range of recent studies, highlights how the impact of trade shock on innovation depends on the specifics of the firms, industries, and countries affected, and offers a guidepost for research and policy analysis going forward in this important arena.In the third chapter, Pierre Azoulay, Erica Fuchs, Anna P. Goldstein, and Michael Kearney shed new light on the Advanced Research Projects Agency (ARPA) model of research management. The authors begin by presenting a detailed description of the ARPA model, including its initial instantiation in the Defense Department (DARPA). The ARPA model is a distinct project-oriented approach to funding and managing high-risk R&D, and is often cited as critical for a wide range of innovations, including the Global Positioning System (GPS), the internet, stealth technologies, and autonomous navigation. Building on the authors’ recent study of ARPA-E (an ARPA-type model in the Department of Energy), the paper offers a method for diagnosing what sorts of research efforts are “ARPA-able.” Using data from ARPA-E, they offer evidence for the impact of active topic selection and project management on the overall process of innovation, as well as medium-term innovation outcomes. The essay offers both a primer of the ARPA approach for both policy analysis and management, and offers key insight into the types of projects and initiatives that might be appropriate for this type of funding and management.The fourth chapter, by Nicholas Bagley, Benjamin Berger, Amitabh Chandra, Craig Garthwaite, and Ariel D. Stern, focuses squarely on a classic area of innovation policy—the Orphan Drug Act. Since the passage of the Orphan Drug Act in 1983, there have been a number of key changes in the US health care landscape and in the nature of drug discovery and development. Four major points are emphasized. First, the authors illustrate pricing dynamics that show that, relative to other branded medications, the price of orphan-designated drugs has increased significantly over time. Second, the authors show how advances in technology have enabled increased market segmentation of diseases. Third, the authors show how the growing use of surrogate endpoints has arguably changed the nature of the drug-development process. And, finally, the authors vividly demonstrate the use of strategies by firms staggering the introduction of multiple orphan indications for a single drug. Using high-quality data on prices and quantities, the authors highlight cases where orphan status may have been more or less in line with the objectives of the Act (i.e., enhancing access for small patient populations for which development effort may otherwise not have been worthwhile). The authors conclude by considering the potential impact of a more flexible and responsive policy regime.The fifth chapter leads a duo of papers that discuss the growing role of artificial intelligence (AI) in the economy. Drawing on research presented at the NBER Economics of Artificial Intelligence conference at the University of Toronto, conference organizers Ajay Agrawal, Joshua Gans, and Avi Goldfarb outline a series of arguments about how this new general purpose technology may come to diffuse through and influence the economy. They begin by emphasizing how this diffusion will likely take time, so to expect dramatic productivity growth effects at this point in time may be overly optimistic. The authors outline how the ultimate diffusion pattern will be shaped by forces such as privacy regulations, trade agreements, and legal liability. Then, in discussing the ultimate potential of AI on the economy once it has diffused, the authors discuss implications for economic inequality as well as policy areas such as antitrust and intellectual property.The final chapter, by Jason Furman and Rob Seamans, continues the discussion of AI policy by providing further insights into the spread of this technology throughout the economy. The authors consider the unique question of whether an “AI-specific commission” might be a worthwhile political institution, and then move on to major issues surrounding firm competition and labor force participation. Regarding the implications of AI for competition, Furman and Seamans highlight the role of data portability—how easily consumers can access and transfer their data between services—and how it may come to be a major reason why few or many firms participate in an industry. Their idea for the potential role of a third-party data steward may be one way to address these types of concerns. Regarding the labor force, the authors evaluate the implications of a universal basic income (UBI)—a policy increasingly suggested as a way to ameliorate AI-induced job loss—emphasizing that the economic logic surrounding this policy is not immediately straightforward, and may in fact have more unintended consequences relative to alternative policies.These six essays offer synthetic treatments of a range of timely areas in innovation policy that are the subjects of active research. It is made clear that there are no easy answers to the questions highlighted, but this year’s volume aims to connect the best of recent economic research to the major issues facing innovation policymakers today.EndnoteWe are grateful to the Ewing Marion Kauffman Foundation for financial support for the Innovation Policy and the Economy workshops and this publication. We would also like to thank NBER Innovation Fellows Kyle Myers and Michael Andrews for excellent planning and editorial assistance for the 2018 meeting and publication. For acknowledgments, sources of research support, and disclosure of the authors’ material financial relationships, if any, please see http://www.nber.org/chapters/c14093.ack. Previous articleNext article DetailsFiguresReferencesCited by Innovation Policy and the Economy Volume 192019 Sponsored by the National Bureau of Economic Research (NBER) Article DOIhttps://doi.org/10.1086/699930 © 2019 by the National Bureau of Economic Research. All rights reserved.PDF download Crossref reports no articles citing this article.