Why do firms do basic research (with their own money)?

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Citation: Nathan Rosenberg (1990) Why do firms do basic research (with their own money)?. Research Policy (RSS)
DOI (original publisher): 10.1016/0048-7333(90)90046-9
Semantic Scholar (metadata): 10.1016/0048-7333(90)90046-9
Sci-Hub (fulltext): 10.1016/0048-7333(90)90046-9
Internet Archive Scholar (search for fulltext): Why do firms do basic research (with their own money)?
Tagged: Business (RSS) R&D (RSS), basic research (RSS), innovation (RSS)


The question Rosenberg attempts to shed light on in this article is clear from the title: Why do private firms perform basic research with their own money?

Rosenberg first introduces the puzzle of firms investing into basic research which is roughly based around the idea that basic research is both more uncertain from the perspective of the market and its outputs are likeliy to be less appropriable.

Rosenberg begins by explaining that basic research can, indeed, be thought of an investment but that is a very long term investment. Many of the conclusions that follow are based around this idea that firms able to do longer-term planning can benefit from engaging in basic research.

As a result, we can see that more entrenched and established firms will engage in basic research and that these firms, or smaller firms based by venture capitalists, maybe willing to make riskier investments in basic research with the hopes of larger payoffs (e.g., biotechnology).

Rosenberg also points out, with a number of very interesting examples, that a number of firm-based basic research ended up being accidental. Or rather, firms aimed to establish some applied research, and in the process and sometimes actually by accident, they have stumbled onto major basic findings and even ones that have won Nobel prizes. Additionally, he suggests that individuals in firms may have mixed incentives that differ from the firms that employ them and that promote basic research within applied contexts.

Additionally, firms may find that the best way to stay plugged into a research community is to participate it and this need may drive some basic research. Finally, he argues that in some unusual markets (like government monopsony environments), basic research may act as a signal of competence to buyers.

Returning to the fundamental "long term" point, Rosenberg argues that any policy that tends to promote more long-term planning within companies is also likely to support basic research.

Theoretical and Practical Relevance

Rosenberg's article has become a central citation in work on the economics of science. His article is full of testable propositions and a number of them have been operationalized and tested in research aiming to tease apart the basic/applied research literature.