Efficient Industrial Policy for Innovation: Standing on the Shoulders of Hidden Giants

Efficient R&D subsidies target the technology fields where innovation generates valu-
able knowledge spillovers. To quantify potential efficiency gains, we infer field-specific
subsidy return rates from patent data by combining new measures for innovations’
private and spillover values with structural estimates of the idea value distribution
and innovation costs. Within-country returns from optimally targeted subsidies are
at least 40% higher than returns from non-discriminating policies. Coordinating
field-specific subsidies across OECD countries yields a further 30% higher returns.
Hence, solving information and coordination problems related to industrial policy for
innovation could lead to large welfare gains.