2.2. Bases teóricas:
2.2.4. Los consumidores:
2.2.4.1. La importancia de la publicidad para el consumidor y el mercado:
1. Introduction
In this Annex we focus solely on the non-health benefits of medical research and development (R&D). It is extremely important to consider non-health as well as health gains. Returns to investment in medical research by one organisation may benefit not only that organisation but also other organisations in the medical sector, in other sectors, and also in other countries (although this last is outside the scope of the current research project). That is, there are spillovers. In this paper, we present the findings of our review of the research spillovers literature in general and as applied specifically to medical research.
The structure of this Annex is as follows. In Section 2 we outline the methodology used for the literature review. Section 3 describes the concepts of knowledge and information and goes on to discuss the differences between private and social rates of return to R&D, to introduce the concept of spillovers. Section 4 summarises the literature analysing the sources of spillovers. Section 5 discusses the main transmission mechanisms for spillovers identified by the literature. In Section 6 we comment on the literature on the economics of the geography of innovation, highlighting how spillovers have helped develop this strand of work. Section 7 summarises the main results.
2. Methodology
We have adopted a selective approach for the literature search, mainly driven by:
• our accumulated knowledge and experience on the topic
• core references from past reviews of the value of the pharmaceutical industry, which have also helped us in identifying key authors in the fields.
This is a strategy suitable for methodological reviews where conventional keyword based search strategy (such as R&D) may result in a very large number of references – too large to be handled within the time constraints of this project.
Nevertheless, we searched the following databases: British Library Integrated Catalogue – search on Serials/ Periodicals; economic working papers database – EconPapers; EconLit; and PubMed. We looked for papers that combined the following keywords (or nearest equivalents): ‘medical’; ‘research’ (or ‘R&D’ or ‘research and development’ or ‘medical research’); ‘spillovers’ (or ‘externalities’ or ‘synergies’); ‘social rate of return’ (or ‘rate of return’). Part of the remit was to explore the factors attracting private R&D to the UK, including public medical research, so we also carried out a literature review combining the following keywords: ‘location’; ‘research’ (or ‘R&D’ or ’research and development’ or ‘medical research’); ‘companies’ (or ’firms’ or ‘enterprises’ or ‘business’ or ‘economic activity’ or ‘manufacturing’ or
‘clinical trials’); ‘productivity’; ‘competitiveness’; ‘nations’ (or ‘countries’ or ‘regions’). As an illustration of the large number of hits obtained with the different databases, the search criteria (‘medical’ and ‘research’ and ‘spillovers’ or ‘externalities’ or ‘synergies’) yielded 100, 829 and 345 hits in the economic working papers database (EconPapers), PubMed and the British Library Integrated Catalogue respectively.
The references listed in previously known and identified literature also provided an additional indirect route to the ‘grey literature’, which is information produced at all levels of government, academia, business and industry in formats not controlled by formal publishing, monographs and books.
Overall, we have identified and reviewed 139 papers/ reports.
3. Measuring rates of return from R&D
Our starting point is defining the basic characteristics of ‘knowledge’.3.1 Knowledge: basic characteristics
Arrow (1962) suggests that knowledge is inherently a public good. He also argues that knowledge differs from the typical factors of production (labour, capital) in two ways. First, it is non-excludable, non-rivalrous or non-exhaustible. Thus, knowledge developed for any particular application can easily spill over and have economic value in very different applications. This leads to what has become known as the appropriability problem for any organisation generating new information. This problem may diminish firms’ incentives to invest in R&D. Second, compared with other factors of production knowledge has a greater degree of uncertainty, a higher extent of asymmetries and a greater cost of transacting new ideas.
It is also useful to distinguish between tacit and codified knowledge. Tacit knowledge can be difficult to write down in such a way that is meaningful and readily understood. It needs face-to-face and even nonverbal communication as well as reciprocity, all of which may be ineffective or infeasible over longer distances. It has also been referred to as “sticky knowledge” (von Hipple, 1984). Codified knowledge, on the other hand, can be written down – it is more akin to information than to tacit knowledge. It is better structured and less ambiguous. The cost of transfer of codifiable knowledge is lower than for tacit knowledge and is not bounded by close proximity of the source of knowledge. This distinction is critical in giving rise to the concept of ‘localised knowledge spillovers’, as discussed later.
3.2 Private versus social rate of return from R&D Early attempts to identify the link between national R&D spending and economic performance employ macroeconomic models of growth which integrate R&D stock into the traditional production function as an input – treated as a residual factor accounting for growth in earlier works (Solow, 1957) and as a source of endogenous growth in more recent models (Romer, 1986; Lucas, 1988).
Empirical estimation of the impact of R&D stock on economic performance has proved to be problematic due to difficulties in:
• measuring R&D stock and economic output • developing reliable econometric models using
aggregate data which do not allow for variations across sectors and firms.
In general, the main limitation of these models is that they work as a ‘black box’ producing financial measures of social return to R&D investment, but unable to explain how R&D spending and innovation generate economic development.
Three main methodological approaches have been used to assess the value and benefits from research: econometric studies, surveys and case studies. The first method relies on the analysis of large databases; surveys have been conducted of R&D managers; while case studies attempt to trace all the antecedents to an innovation. Each method has its own advantages and disadvantages. In this Annex we draw upon the evidence generated by all three methods.
At the more general level, it is possible to distinguish between two types of return:
• private or direct return to investment, meaning the economic benefits generated by a specific R&D project and accrued by the organisation originally involved, through royalties and/or sales of a new product or process
• social or indirect return to investment, meaning economic and non-economic benefits spilling over for third parties to exploit, e.g. new knowledge and economic conditions that stimulate and enhance innovation and technical progress.
The difference between the social and the private rate of return represents R&D spillovers arising from innovative initiatives or projects undertaken by a public or private organisation and not captured by the originator. The starting point for our work on estimating the magnitude of the impact of R&D spillovers from public and charitable medical research in the UK is Garau and Sussex (2007), who calculated the value of two major British based, research intensive, pharmaceutical companies to the UK’s economy. The estimation is a practical application of an economic methodology
based on the ‘economic rent’ that the companies earn for the UK. Specifically, they estimate the net additional income brought to the UK by these companies’ activities in excess of the income they would be expected to generate in the next best alternative use(s) to which labour and capital would be diverted, if, hypothetically, these companies ceased to operate in the UK. One of the key elements generating the economic rent is the spillovers generated by the R&D investment carried out by these companies in the UK.
The underlying framework behind these authors’ methodology for estimating the value of R&D spillovers in particular is illustrated in Figure A6.1. Here it is applied to pharmaceutical R&D in particular – but it could be applied to R&D carried out in any sector.
As shown in Figure A6.1, R&D investment undertaken in one company not only generates benefits to itself (the ‘private’ return – shown in purple above) but also could bring about economic benefits to other companies and organisations operating in the same industry (shown in blue), and to organisations in other sectors altogether (shown in green). The sum of all three ‘rings’ represents the total social return to the investment.
Garau and Sussex (2007) estimate, among other things, the spillovers generated by the (private) pharmaceutical R&D carried out by two companies in the UK. The range of estimates is based on empirical economic literature looking at the rate of return to private R&D. The total social rate of return is found to be around 51%, of which only 14% is captured by the investing firm, 26% is captured by other firms in the same sector, and 11% is captured in other (non-pharmaceutical) sectors of the UK economy. As highlighted by the authors, this estimate is highly uncertain, however, owing to the wide range of values attributed to the social rate of return to R&D in different studies.
The work carried out in Garau and Sussex (2007) is based on the methodology described in the joint Association of the British Pharmaceutical Industry (ABPI), Department of Health, Department of Trade and Industry (DTI) and HM Treasury study undertaken for the UK’s Prime Minister’s Pharmaceutical Industry
Figure A6.1 Spillovers from private pharmaceutical R&D Return to other sectors Return to the pharmaceutical sector as a whole
Private rate of return to the companies investing in R&D
Competitiveness Task Force (PICTF) in 2000 and published in the December 2001 PICTF report Value of the Pharmaceutical Industry to the UK Economy (PICTF, 2001). The PICTF report presented an estimate of the economic value added by the pharmaceutical industry as a whole to the UK economy.
4. Sources of spillovers
Before discussing in detail the sources of R&D spillovers identified by the literature, we present the conceptual framework that forms the basis for the qualitative and quantitative analysis carried out on this topic. 4.1 Conceptual framework
It is extremely important to consider wider economic gains as well as health gains when assessing the economic benefits of medical research. These economic gains are additional to the health gains: they refer to the income for UK residents that is generated by public medical research investment. This is distinct from the monetary value of health (QALY) gains that were estimated in Chapter 5.
Investment in medical research by one organisation, public or private, may benefit not only that organisation but also other organisations in the medical sector, in other sectors, and also in other countries: i.e. ‘spillovers’. Spillovers should not be viewed as accidental: they can be, and are, a deliberate policy objective of spending on public research. Our interest lies in spillovers generated by public medical R&D. Given the link between R&D and knowledge, we do not distinguish here between R&D spillovers and knowledge spillovers but refer to both taken together.
For illustrative purposes, we take a simplified view of the inputs and outputs of the R&D process. ‘Public research’ refers to R&D carried out or funded by public and charitable organisations, and includes university research. Private R&D is carried out by privately owned enterprises. These inputs, either in isolation or in combination, lead to some ‘output’: new products, new patents or better performance (measured in a number of ways) by firms. These outputs generate additional GDP, i.e. income, and economic rent for the residents of the UK.
As a preliminary step to quantify the spillovers generated by the R&D analysed in this work (see Chapter 6 of this report), we conducted a literature review on the topic of spillovers. The review was originally intended to cover only public medical research. That literature was relatively scarce, however, so we extended the search to cover public and private R&D in general, without focusing on medical research in particular.
The literature on R&D spillovers, as a general concept, is relatively abundant. However, the literature is not clear about defining and outlining the conceptual framework
within which spillovers exist and transmit. The aim of this section is to combine and synthesise the existing literature to present a (simplified) conceptual framework that will help the reader understand better what spillovers are and how they work in practice.
This section has been divided into three main elements, each discussing in turn the three sources of spillovers described below (sections 4.2, 4.3 and 4.4 of this Annex respectively). We distinguish between public and private R&D as sources of spillovers.
The first ‘source’ refers to the degree of complementarity between public and private R&D, and, in particular, whether and how much private R&D is generated as a result of public R&D. Section 4.2 of this Annex relies mainly on the literature on biomedical R&D, given the distinct nature of the R&D process for pharmaceuticals. An additional interesting result identified from this literature is that the relationship between public and private pharmaceutical R&D is bi-directional, i.e. private R&D helps generate public R&D, as well as the other way around, and it is the interaction between the public and private research sectors that helps to generate and develop new technologies. However, and as discussed in more detail later, the quantitative evidence available looks primarily at the first effect, i.e. how much private R&D is done thanks to public R&D. This strand of the literature looks at the relationship at an aggregate level, rather than looking at individual organisations. Another part of the literature looking at the public– private research relationship explores how new firm start-ups and the location decisions of new firms are affected by university and other public research. This literature looks at other sectors other than the biomedical sector. Several authors argue that the decision of new firm start-ups where to locate is influenced by traditional regional characteristics (such as size and concentration of population) as well as by the opportunity to access knowledge generated by universities and other public laboratories.
The main differences between these two strands of the literature (other than the sectors analysed) is that the former literature is more aggregated in that it does not explore how individual firms/agents respond. The latter literature looks at decisions taken by individual organisations (in this case, firms) as a result of public R&D. In addition, the latter can be described as the stimulation of creating capacity to do R&D (via new firms), while the former is more of a stimulus of R&D itself. The second source of spillovers is public research (see Section 4.3 of this Annex). The literature here primarily focuses on university research, which we take as ‘public’ R&D. The literature for this section focuses on a micro level, in that it explores the reactions and decisions taken by individual organisations, such as individual firms, in response to public research.
Private R&D is the third source of spillovers identified by the literature (see Section 4.4). Figure A6.2 represents graphically public research as a source of spillovers and its complementarity with private R&D. Sections 4.2 to 4.4 in effect describe Figure A6.2 in more detail, referring back to the three sources of spillovers mentioned above. 4.2 Complementarity between
public and private R&D
From our literature review we have grouped a selection of papers into two broad approaches to the analysis of the relationship between public and private R&D. On the one hand, we have grouped together the literature looking at the biomedical sector. Then there is another strand of the literature that explores the links between public research (in particular, university research) and the decision to locate new firm start-ups in all sectors, not just the biomedical sector. We take these two strands of the literature in turn.
4.2.1 The biomedical sector
Within the biomedical sector, public sector research plays an important role in the discovery of new drugs and other health care technologies, but the reality of the interaction between the public and private sectors is much more complex than a simple basic/applied dichotomy would suggest. As some authors have argued, the conventional picture of public research as providing a straightforward input of basic knowledge to downstream, applied private research may be quite misleading. Thus, the relationship between the public and private sectors in the pharmaceutical industry is not well described as a ‘cascade model’.
Referring to Figure A6.2, the arrows headed ‘A1’ and ‘A2’ illustrate the two-way relationship between public and private R&D. Arrow ‘A1’ illustrates the fact that some private R&D takes place in the UK thanks to public R&D in the UK. However, some private R&D would take place even if all public R&D activities were to be eliminated. Moreover, and as the literature suggests, we need to take into account the public sector R&D generated due to the private R&D – the arrow labelled ‘A2’. Note that arrow ‘A2’ stems from both ‘new’ and ‘existing’ private
Annex to Chapter Six
Figure A6.2 Sources of spillovers: public and charitable R&D and its interaction with private R&D
OUTPUTS (GDP) R&D INPUTS B1 B2A C Innovation (patents/new products) Firms’ performance: • Stock market valuations • Growth rates A2 A1 (a) New start-ups (b) Existing firms
Caveats:
• The spillovers within ‘private’ R&D are not shown. • The Figure does not include the geographic
dimension.
• The Figure does not distinguish between different sectors, e.g. health and non-health (for the ‘outputs’ in particular).
Public & charitable R&D Private R&D
B2B
B2