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A snow plow clears slush around Parliament Hill amid heavy rain in Ottawa on March 10, 2011. (Sean Kilpatrick/The Canadian Press)
A snow plow clears slush around Parliament Hill amid heavy rain in Ottawa on March 10, 2011. (Sean Kilpatrick/The Canadian Press)

Subsidizing R&D not the solution Add to ...

A good lesson we can take from Saturday's story on problems with the federal government's SR&ED program is this: If low productivity is a problem (and it is), then subsidizing research and development (R&D) is clearly not the solution.

The link between R&D activities and productivity has never been shown to be strong enough to justify using it as a lever for policy.

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Research and development is a specialized activity, and there's no reason for any particular firm to engage in it.

It is true that having access to the best available equipment and the best available technology is a key to improving worker productivity. But it doesn't follow that it's always preferable to develop that new technology in-house, no more than it makes sense to insist that capital equipment be produced in-house.

If it is cheaper to obtain access to new technologies and new equipment by trade, then that's what firms should do.

It's an open question as to what extent governments should be in the business of encouraging R&D.

Many R&D projects amount to what the economists Philipe Aghion and Peter Howitt call a Schumpeterian process of 'creative destruction,' the displacement of an existing technology by one that may be only slightly better.

The private gain - in the form of a monopoly on a dominant new technology - can be very large. But the gain to society is the difference between the old and new technologies, and this increment may not justify the costs. Some the R&D done by pharmaceutical firms certainly falls into this category.

More generally, it's not clear just how we can subsidize R&D. All we can really do is reward firms that undertake activities that look as though they are consistent with research and development.

But once governments start giving out money on that basis, we should not be surprised when firms conclude that going through the motions of R&D is a more profitable activity than actually developing new technologies.

Follow on Twitter: @stephenfgordon

 

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