IMF Working Papers

What Drives Innovation? Lessons from COVID-19 R&D

By Ruchir Agarwal, Patrick Gaulé

February 19, 2021

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Ruchir Agarwal, and Patrick Gaulé. What Drives Innovation? Lessons from COVID-19 R&D, (USA: International Monetary Fund, 2021) accessed October 6, 2024

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Summary

To examine the drivers of innovation, this paper studies the global R&D effort to fight the deadliest diseases and presents four results. We find: (1) global pharmaceutical R&D activity—measured by clinical trials—typically follows the ‘law of diminishing effort’: i.e. the elasticity of R&D effort with respect to market size is about ½ in the cross-section of diseases; (2) the R&D response to COVID-19 has been a major exception to this law, with the number of COVID-19 trials being 7 to 20 times greater than that implied by its market size; (3) the aggregate short-term elasticity of science and innovation can be very large, as demonstrated by aggregate flow of clinical trials increasing by 38% in 2020, with limited crowding out of trials for non-COVID diseases; and (4) public institutions and government-led incentives were a key driver of the COVID-19 R&D effort—with public research institutions accounting for 70 percent of all COVID-19 clinical trials globally and being 10 percentage points more likely to conduct a COVID-19 trial relative to private firms. Overall, while economists are naturally in favor of market size as a driving force for innovation (i.e.“if the market size is sufficiently large then innovation will happen”), our work suggests that scaling up global innovation may require a broader perspective on the drivers of innovation—including early-stage incentives, non-monetary incentives, and public institutions.

Subject: Economic sectors, Financial crises

Keywords: COVID-19, Innovation, Market Size, Pharmaceutical Industry

Publication Details

  • Pages:

    58

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

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  • Series:

    Working Paper No. 2021/048

  • Stock No:

    WPIEA2021048

  • ISBN:

    9781513570068

  • ISSN:

    1018-5941