Industry Investment in Basic Research Assuming Interdependence of Benefits from Appropriable and Inappropriable Activities

Using a model of the resource allocation behavior of a group of firms, Joglekar and Hamburg (1983) demonstrate that unaided industry allocation to basic research is suboptimal and that in stimulating this allocation, provision of government seed money is generally counterproductive, while the provision of matching subsidies is not cost-efficient. Using basically the same model, but focusing on the case of a homogeneous industry, Joglekar and Hamburg (1986) further identify several industry characteristics that increase the degree of suboptimality of investment in basic research, and consequently, the need for government intervention. Joglekar and Hamburg (1983), (1986) assume that a firm's benefits from its investment in appropriable activities are independent of its benefits from the industry's total investment in the pertinent basic (i.e., inappropriable) research. Investment theory suggests that a firm's benefits often depend upon its investment portfolio and that an investment in basic research that is not supported by suitable investments in other activities (e.g., plant and equipment, personnel training, etc.) may yield far smaller benefits than could be potentially obtained. Therefore, in this paper, I present a model that assumes such an interdependence of benefits. I find that most of Joglekar and Hamburg's (1983), (1986) conclusions are confirmed by the new model.