Knowledge Spillover - Policy Implications

Policy Implications

As information is largely non-rival in nature, certain measures must be taken to ensure that, for the originator, the information remains a private asset. As the market cannot do this efficiently, public regulations have been implemented to facilitate a more appropriate equilibrium.

As a result, the concept of intellectual property rights have developed and ensure the ability of entrepreneurs to temporarily hold on to the profitability of their ideas through patents, copyrights, and other governmental safeguards. Conversely, such barriers to entry prevent the exploitation of informational developments by rival firms within an industry.

On the other hand, when the research and development of a private firm results in a social benefit, unaccounted for within the market price, often greater than the private return of the firm’s research, then a subsidy to offset the underproduction of that benefit might be offered to the firm in return for its continued output of that benefit. Government subsidies are often controversial and while they might often result in a more appropriate social equilibrium, they could also lead to undesirable political repercussions as such a subsidy must come from taxpayers, some of whom may not directly benefit from the researching firm’s subsidized knowledge spillover. The concept of knowledge spillover is also used to justify subsidies to foreign direct investment, as foreign investors help diffuse technology among local firms.