Should We Like Chinese and Indian R&D?

Michael Mandel

There's been an awful lot of stories about how the U.S. advantage in innovation is eroding, especially as more R&D is being done in India, China, and other Asian countries. Just recently a Korean lab announced the first dog clone.

Pros and cons. On the plus side, ideas travel easily across national borders, so research done elsewhere quickly spreads back to the U.S. On the minus side, the innovators often get a lead, which translates into more innovation and faster economic growth.

A new paper from economists Laura Bottazzi and Giovanni Peri estimates the size of these two effects (though they don't quite put it this way). They write:

A 1% positive shock to the log of R&D in US increases the knowledge creation in other countries by an average of 0.35% within ten years. The same shock generates a maximum 6% effect on the US stock of knowledge after five to ten years and then declines slightly.

Let's translate this into English. An increase in U.S. R&D does have a substantial positive effect on other countries, but the eventual benefit to the U.S. is perhaps 20 times larger.

Whoa! I know that this result depends on lots of assumptions, but this really takes me aback. Presumably the results from investment in R&D in Asia would be similar...that the innovating country would benefit a lot more than the U.S.

I've been a big optimist about the U.S. gain from innovation in China, India, and Asia more broadly...but maybe I've been too optimistic. I've got to think about this.

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