Basic Research, Complexity, and Growth

We analyze public investment in basic research in a multi-country multi-industry environment with international trade. In our economy basic research generates ideas which private firms take up in applied research to develop new varieties. Such development requires industry specific know-how, and countries’ current specialization in international trade therefore determines which ideas can be commercialized domestically. We demonstrate that the equilibrium in our economy is consistent with key patterns observed from the data. We then compare basic research investments of national governments with optimal investments of a global social planner. We show that decentralized investments are inefficient along three dimensions: There is typically too little global investment in basic research. Basic research is too heavily concentrated in industrialized countries. And basic research is potentially not sufficiently directed to support innovation in complex, high-tech industries.