Innovation Systems: Positive and Normative Perspectives

Innovation activity is central to macroeconomics and is the key to sustained growth in living standards. Innovation is also critical for a company’s competitiveness, as companies that invest more in R&D experience faster growth of sales and productivity. Given its importance, it is somewhat surprising how little we know about innovation. A central question in the innovation literature concerns the government’s role in the innovation system, but the literature has not explored at all the question of whether the government should be directly involved in conducting innovation activities. This project increases our understanding on two central questions. First, to understand the causes and consequences of the way countries innovate, the project compares the innovation models in the US and Germany and identifies their key differences, the factors that have led to these differences, and the consequences they have on the performance of companies in the global markets and on income inequality. Second, the project investigates the existence of economic foundations for the government’s direct involvement in conducting innovation versus merely financing it.