Why Basic Science Matters for Economic Growth

IMF Blog, October 6, 2021

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Basic scientific research affects more sectors, in more countries and for a longer time than applied research (commercially oriented R&D by firms).
Basic research is not tied to a particular product or country and can be combined in unpredictable ways and used in different fields.
Citations for scientific articles used for basic research peak at about eight years versus three years for patents.

Knowledge transfer between countries is an important driver of innovation, especially in emerging market and developing economies.
Emerging market and developing economies rely much more on foreign than homegrown research (basic and applied) for innovation and growth.
In countries with strong education systems and deep financial markets, the estimated effect of foreign technology adoption on productivity growth—through trade, foreign direct investment or learning-by-doing—is particularly large.
Quantitative finding: a 1-percentage-point increase in foreign basic knowledge increases annual patenting in emerging market and developing economies by around 0.9 percentage point more than in advanced economies.

Patenting is used as a proxy for measuring innovation.
An increase in the stock of patents by 1 percent can increase productivity per worker by 0.04 percent.
A 10 percent permanent increase in the stock of a country’s own basic research can increase productivity by 0.3 percent.
A 10 percent permanent increase in the stock of foreign basic research increases productivity by 0.6 percent.
Basic science plays a larger role in green innovation (including renewables) than in dirty technologies (such as gas turbines).

Private firms tend to underinvest in basic research because they can capture only a small part of the uncertain financial reward, providing a case for public policy intervention.
Funding basic research only at universities and public labs could be inefficient and may lose synergies between the private and public sector; it may also be difficult to disentangle basic and applied private research for the sake of subsidizing only the former.
An implementable hybrid policy modeled in the analysis:
- Doubles subsidies to private research (basic and applied alike).
- Boosts public research expenditure by a third.
- Estimated outcome: could increase productivity growth in advanced economies by 0.2 percentage point a year.
Better targeting of subsidies to basic research and closer public‑private cooperation could boost productivity further at lower cost to public finances.
These investments would start to pay for themselves within about a decade and would have a sizeable impact on incomes.
Historical counterfactual estimate: per capita incomes would be about 12 percent higher than they are now had these investments been made between 1960 and 2018.
Because of important spillovers to emerging markets, ensuring the free flow of ideas and collaboration across borders is key.

Source: Why Basic Science Matters for Economic Growth — Philip Barrett, Niels-Jakob Hansen, Jean-Marc Natal, Diaa Noureldin; October 6, 2021.