IN THE UNITED STATES, we largely rely on market forces to give private
firms the incentive to conduct research and development. Firms conduct
R&D because it can generate the knowledge to produce new products
or to produce existing products at lower cost; firms can use the knowledge
directly or they can sell it for others to use in production.
Because such a sale of R&D results occurs after the R&D has been
undertaken, it is a form of ex post cooperation. In recent years, partly
because of the rising concern over national competitiveness, the effectiveness
of market forces in spurring private firms to conduct R&D has
been questioned. Empirical studies have found that the social benefit
from R&D may be greater than the benefit available to the innovator.
Bernstein and Nadiri, for example, estimate that the social rates of
return to R&D investment in both the chemical products and nonelectrical
machinery industries were roughly double the corresponding
private rates of return in 1981. And they found that the social rate of
return was approximately ten times the private rate in the scientific