RRpage9-dp87

"European Technology Policy"

Jonathan Eaton, Eva Gutierrez and Samuel Kortum

IED Discussion Paper 87, August 1998

A number of economic indicators show Europe lagging behind the US and Japan in recent years. There is a growing perception that Europe is falling behind, especially in high-tech industries like software and biotechnology. This perception has received some support from empirical studies measuring relative research performance. For example, on average, European firms employ a substantially smaller fraction of workers as researchers.

In their paper, Eaton, Gutierrez and Kortum investigate the causes underlying this seemingly ‘poor’ relative performance, link it quantitatively to economic indicators like GDP, and analyze the impact and

relative efficacy of alternative policy measures designed to promote innovation.Specifically, the paper proposes an analytic framework to answer these questions: (i) how do markets and market size offer incentives to do research? (ii) how is research linked to technological advancement? and (iii) how do technological advances get reflected in economic performance?

The first set of empirical results concerns the success of their model in explaining prevailing levels of research activity in Europe and in assessing the benefits from increased research. By decomposing research intensity into productivity effects and market incentive effects, they demonstrate that the lower research intensity in Europe is due mainly to the inability of domestic markets to provide adequate incentives. Further, Europe would gain from increasing its research effort.

The second set of findings relate to appropriate remedial policies. Three of them are directly related to research intensity: subsidies, strengthened patent protection, and enhanced research productivity. The third approach may be implemented by increased government support, as the data indicates a positive association between government support and the productivity of private research. The authors subsequently consider the pros and cons of increased research at home vis-a-vis technology adoption. In the latter case, Eaton, Gutierrez and Kortum point out that higher levels of education and imports may facilitate cheaper and quicker adoption. Finally, they argue that any policy must take the form of a cooperative venture since there is tremendous scope for free riding in the European Union.