I will focus on one important component of innovation policy: government support for R&D. Indeed, some economists have argued that because of the potentially high social return to basic research, expanded government support for R&D could, over time, significantly boost economic growth. The economic arguments for government support of innovation generally imply that governments should focus particularly on fostering basic, or foundational, research. Economic policy affects innovation and long-run economic growth in many ways. Certainly there have been disappointments; for example, the surge in federal investment in energy technology research in the 1970s, a response to the energy crisis of that decade, achieved less than its initiators hoped. Similarly, I don't give too much thought to the multitude of provisions for sharing revenues from foreign translations, from selling the rights to produce my books as stage plays and movies (yep, those provisions are in the contracts), etc. There are other things I care about more than those things, so I leave my editor alone on those topics and save my political capital for other matters. This research suggests that technological progress and the accumulation of intangible capital have together accounted for well over half of the increase in output per hour in the United States during the past several decades.
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Governments in many countries directly support scientific and technical research; for example, through grant-providing agencies (like the National Science Foundation in the United States) or through tax incentives (like the R&D tax credit). Of course, the rationale for government support of R&D would be weakened if governments had consistently performed poorly in this sphere. For example, technological prowess may help a country reap the financial and employment benefits of leadership in a strategic industry. The technological leadership of the United States was and continues to be built in substantial part on the contributions of foreign-born scientists and engineers, both permanent immigrants and those staying in the country only for a time. On the one hand, the diffusion of scientific and technological research throughout the world potentially benefits everyone by increasing the pace of innovation globally. To the extent that countries gain from leadership in technologically vibrant industries or from local spillovers arising from inventive activity, the case for government support of R&D within a given country is stronger.
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