Innovation is one of the key drivers of productivity growth
What is the importance of patents? Their number is a measure of the level of innovation. A 1 percent increase in the number of patents can increase productivity per worker by 0.04 percent. It doesn't seem like much, but it adds up to a noticeable effect. Small increases over time allow for a higher standard of living.
We estimate that a continuous increase of 10 percent in a country's own basic research can increase productivity by 0.3 percent. A similar increase in basic research in other countries has a larger effect. Productivity increases by 0.6 percent. Since these are only averages, the impact on emerging and developing countries is probably even more significant.
Basic science also plays a more important role in green innovation (including renewable energy) than in polluting technologies (such as gas turbines), suggesting that policies that promote basic research can help combat climate change.
Policy measures to create a more stable and inclusive future
Because private companies can reap only a small fraction of the uncertain financial benefits from engaging in basic research, they typically underinvest in it, making a compelling argument for appropriate public policy measures. But designing appropriate policy measures, including determining how to fund research, can be a challenge. For example, it may not be sufficient to fund basic research only at universities and government laboratories. In this way, a potentially important interaction between the private and public sectors would be lost. It may also be difficult to separate private basic research from applied research in order to subsidize only the former.
Our analysis suggests that having a feasible hybrid policy of doubling subsidies to private research (both basic and applied) and increasing spending on public research by a third could increase productivity growth in advanced economies by 0.2 percentage points per year. More targeted subsidies for basic research and closer cooperation between the public and private sectors could provide an even stronger boost to productivity while reducing costs on the part of government.
These investments would begin to pay for themselves within about ten years and would have a significant impact on revenues. We estimate that if these investments were made between 1960 and 2018, per capita income would be about 12 percent higher than it is today.
Finally, at the expense of important secondary effects for emerging market countries, it also serves as the key to a seamless exchange of ideas and cooperation among countries.