Economic conditions for innovation: Private vs. public sector

Abstract

The Hicks induced innovation hypothesis states that a price increase of a production factor is a spur to invention. We propose an alternative hypothesis restating that a spur to invention requires not only an increase of one factor but also a decrease of at least one other factor to offset the companies’ cost. We illustrate the need for our alternative hypothesis in a historical example of the industrial revolution in the United Kingdom. Furthermore, we econometrically evaluate both hypotheses in a case study of research and development (R&D) in 29 OECD countries from 2003 to 2017. Specifically, we investigate the dependence of investments to R&D on the economic environment represented by average wages and oil prices using panel regression. We find that our alternative hypothesis is supported for R&D funded and/or performed by business enterprises while the original Hicks hypothesis holds for R&D funded by the government and R&D performed by universities. Our results reflect that the business sector is significantly influenced by market conditions, unlike the government and higher education sectors.