Answer to Question #274593 in Macroeconomics for gudwill

Question

(a)Why is the amount of R&D spending important for growth? How do the appropriability and fertility of research affect the amount of R&D spending? (b) How do each of the policy proposals listed in (i) to (iv) affect the appropriability and fertility of research R&D spending in the long run, and output in the long run? i. An international treaty that ensures that each country’s patents are legally protected all over the world. ii. Tax credits for each dollar of R&D spending. iii. A decrease in funding of government-sponsored conferences between universities and corporations. iv.. The elimination of patents on breakthrough drugs, so the drugs can be sold at low cost as soon as they are available.

Answer 1

a) R & D spending is important as it increases level of technological frontier. Also in a country, R & D is one of the principal determinants of technological progress. Higher appropriability of results of the research and higher amount of fertility results in higher returns on R &D spending which results in higher amount of R & D spending. 

b)

(i) Appropriability, the R & D spending and also output increases with an increase in patent protection policy in the long run. Increase in patent protection policy decreases fertility. Also, too much protection can decrease R & D spending.

(ii) Fertility, R & D spending and output will increase due to tax credits in the long run while appropriability remains unaffected.

(iii) Fertility, R & D spending and output will decrease as a result of a decrease in funding in the long run while the appropriability will remain unaffected.

(iv) Elimination of patents on drugs results to an increase in fertility while appropriability will decrease. There will be a probability of R & D spending decreasing because the investment is riskier for big firms when there is no patents. The effect of output is uncertain.