Economic Growth through Basic Research by Firms: A science linkage approach

Patents applied by private firms occasionally cite scientific papers. We regard these citations as a signal that the research project of the applying firms involves basic research, and examine the relationship between basic research and firm performance. Firms conducting basic research are more likely to earn higher profit margins, while no monotonic relationship is observed between basic research and sales size. We then construct an endogenous growth model incorporating the basic research investment by heterogeneous firms. Firms' decisions regarding basic research depend on firm size, the necessity for basic research for developing their products, and the degree of knowledge spillover from external basic research results. Quantitative analysis using this model reveals how basic research spillover effects impact economic growth, and how declining R&D efficiency, which has been reported in the literature in recent years, leads to lower growth. Furthermore, we compare public basic research investment with basic research subsidies and demonstrate that the latter is more efficient as a growth policy.