The Limits of Capital: Transcending the Public Financer – Private Producer Split in R&D (STE-WP-40)

Despite a strong tendency in the privatization literature to prefer private sector solutions to public sector ones, in the case of R&D a near consensus has emerged that supports public R&D funding for private production as a solution to a host of market failures. This article explores theoretical justifications for a more expansive role for the state in R&D. Identifying three inherent problems of a straight financier/provider solution, principal-agent problems, cultivation of intrinsic motivations, and generation of cooperation, the paper contend that the state might, under some conditions, take it upon itself to intervene more directly. Drawing on the positive experiences of different states that have moved in recent years from the high technology industries’ periphery to the center, the paper demonstrate how very different states successfully employ public sector solutions to common R&D problems. Analyzing these challenges the paper inquires into the advantages of state production of R&D as a possible response. Based on this analysis, we conclude that there is a strong theoretical and empirical case for state involvement in R&D that goes beyond mere funding, especially in industries that operate in the context of immature markets.