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This paper intends to provide a framework for thinking, debate and action on the role of public sector and the R&D process of innovation.

Extracts from this document...

Introduction

Contents: 1. Introduction......................................................................................3 2. The Linear Model........................................................................................................5 2.1 Historical Background........................................................................7 3. Public Research and Industrial Innovation...................................................9 4. Exogenous VS Endogenous Scientific Knowledge........................................10 5. The role of the public sector...................................................................12 6. Conclusions......................................................................................14 References..........................................................................................15 INTRODUCTION: From time to time, major innovations develop, often driven by the emergence of new technologies, which transform sectors, giving rise to new workforce structures, new types of organization, new relationships between organizations and step-change in overall performance. Technological Innovation has been recognized as a major factor for economic progress. Adam Smith proved that the Division of Labour results to the process of innovation and inventions are the products of the dexterity of the employees. "Philosophers or men of speculation", according to him, are those who can combine many things into one and manage them efficiently. Market is able to lead economy to optimality and government should only intervene when there is a need. He put emphasis on the demand-pull and less on the technology-push. (Smith, 1776) The debate of the model that the process innovation should follow is widely known and it can be summarized into the next question: Should public sector intervene in industrial innovation? The answer is not that simple since there is a wide range of references dealing with it. Many academic references have provided some convincing empirical evidence of impacts and benefits of research to technological change, but there is still an urgent need for comprehensive models, reliable data and analytical tools to describe and monitor links between R&D and industrial innovation in more detail. Some agree that Research and Development should be a public-driven process and many others are against it. It is fully accepted that the most vital sources of productivity growth and increased material welfare are technological change and other kinds of innovation and that is why it is said that only the public sector would deal with it capably for the social good. ...read more.

Middle

Governments spent much money in favor of basic research in universities, institutes and elsewhere. However there is still the argument that they are not spending as much on basic scientific research as they should. According to Nelson 1959, the flow of benefits that would not have been created unless there was no flow of resources to basic science, may be defined as the social value of a given expenditure on basic research. However, the allocation of resources to science means deprivation of a flow of future benefits that would be obtained if the allocation was to other activities. In other words, there is a social cost deriving by the allocation of resources to basic science. The social profit is the difference between the social value and the social cost and he sums up by stating that the amount that should be spent is the amount of resources that maximizes social profit. He continues notifying that since there is no perfectly competitiveness in all sectors of the economy, so as the private-profit opportunities to draw into basic research that quantity which maximizes social profit, the competitive economy will tend to spend less on that good than it should. So the existence of the market failure is what "obliges" government-funding of basic research. (Nelson, 1959) It is commonly believed that the incentives for private investment in R&D are below the social optimum because of the public good character of knowledge or what we now call knowledge spillover effects. Besides the low appropriability of R&D-expenditure in basic research, it is assumed that small firms which operate in niche markets cannot afford large R&D laboratories. Even large firms, mostly risk-averse and short-term oriented, would not bear the large investments necessary because of indivisibility and high uncertainty. In addition, firms are constrained to financing their R&D projects by information asymmetries in financial markets (Harhoff, 1998). In sum, failure in financial and technology markets, indivisibility and economies of scale in R&D add up to a private under-investment in R&D. ...read more.

Conclusion

In addition, a key output of public funded basic research is the creation of new instrumentation and methodologies, but it has not yet been evaluated as it is difficult to recognize that contribution of the government-funded research. The chance for individuals and organizations to participate in the global community of research and technological community is given by the governments, while there is evidence that firms find other ways of creating informal networks. Government policy lies under the need of creating bridges of communication and exchange of knowledge. Another important contribution of the public-funded research is that helps industry and others to solve complex problems. Finally, it is said that government funding in research can attribute to the creation of new firms and in general in new employment since it gives motives for innovation and the problem of the unemployment will not occur. (Martin and Salter, 2001) 5. Conclusion "The rate and direction of the development of a country's science base is strongly influenced by its level of economic development, and the composition of its economic and social activities. In other words, it is socially shaped". (Pavitt, 1998, p. 793) Unquestionably, the debate of whether public sector should intervene or not in the process of the knowledge transfer, it cannot be answered here, since the aim of this essay was to put down the conflicting views of many scientists. The basic framework is that, government should fund the basic research which is related with the sectors of health, environment, and safety and of course government should be responsible to protect intellectual rights without taking advantage of its power of monopoly. To sum up, it is important to mention that the public sector in relation with the private sector should act as complementary aspects of the economy in order to set forward the social welfare and the economic stability. Nowadays, innovation is a core process for a nation to get developed and not only to be a follower in a global economy, when country competitiveness is as important as defense was in the World War II. ...read more.

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