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

IMF Working Papers, February 19, 2021

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Purpose: To examine the drivers of innovation by studying the global R&D effort to fight the deadliest diseases.
Approach: Measure global pharmaceutical R&D activity using clinical trials and compare cross-disease patterns and the COVID-19 response.

Law of diminishing effort:
- 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.
COVID-19 as an exception:
- 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.
Aggregate short-term elasticity:
- Aggregate flow of clinical trials increased by 38% in 2020, demonstrating that the aggregate short-term elasticity of science and innovation can be very large.
- There was limited crowding out of trials for non-COVID diseases.
Role of public institutions and incentives:
- Public research institutions accounted for 70 percent of all COVID-19 clinical trials globally.
- Public research institutions were 10 percentage points more likely to conduct a COVID-19 trial relative to private firms.
Implication for innovation policy:
- While market size is an important driver (“if the market size is sufficiently large then innovation will happen”), scaling up global innovation may require a broader perspective, including early-stage incentives, non-monetary incentives, and public institutions.