From local to global: A theory of public basic research in a globalized world

We analyze public basic research in a multi-country, multi-industry environment with international trade. Basic research generates ideas, which firms take up in applied research to develop new varieties. A country's specialization in international trade thus determines which ideas can be commercialized domestically. We demonstrate that the equilibrium is consistent with key empirical patterns. We then show that national investments may cause inefficiencies along three dimensions: (1) There is typically too little total investment in basic research. (2) Basic research is too heavily concentrated in industrialized countries. (3) Basic research may not be sufficiently directed to support innovation in complex, high-tech industries. These inefficiencies can rationalize international coordination of basic research investments or support policies such as the Bayh–Dole Act.