SKILLED IMMIGRATION AND INNOVATION

A recent paper by Jennifer Hunt (link) finds that the increase in foreign-born graduates strongly contributes to the innovation in the United States:

"In this paper I have demonstrated the important boost to innovation per capita provided by skilled immigration to the United States in 1950-2000. A calculation of the effect of immigration in the 1990-2000 period puts the magnitudes of the effects in context.

The 1990-2000 increase from 2.2% to 3.5% in the share of the population composed of immigrant college graduates increased patenting by at least 81:3 = 10:4%, and perhaps by as much as 18%. The increase in the share of post-college immigrants from 0.9% to 1.6% increased patenting by at least 10.5% and perhaps by as much as 24%. The increase from 0.30% to 0.55% in the share of workers who are immigrant scientists and engineers increased patenting by at least 13% but probably by less than 23%.

While I find evidence for the crowding-out of natives in the short run, in the long run there is evidence for the reverse: that skilled natives are attracted to states or occupations with skilled immigrants. The results hint that skilled immigrants innovate more than their native counterparts, especially if they are scientists or engineers. If correct, the result could reflect higher education of immigrants within skill categories, or positive selection of immigrants in terms of ability to innovate. However, the effect of natives is not as well identified econometrically as the effect of immigrants."

Thanks to New Economist (link) for the pointer!

WHY HUMAN CAPITAL MATTERS

Professor Glaeser of Harvard University wrote an interesting article, addressing the issue of importance of human capital for economic growth, income and welfare (here):

"Also since the mid-1970s, America has become much more unequal. Not all inequality is bad. I wouldn't mind if the guys who gave us Google earned even more, given their contributions to society. I do, however, care deeply that millions of Americans seem to have reaped, at best, modest benefits from the past 30 years of technological change... By contrast, investing in human capital offers the potential for permanent increases in earnings that encourage work. Education increases the ability to deal with innovation, so that investing in skills today will make Americans better able to weather the storms of future technological changes."

R&D, ENTREPRENEURIAL EDGE AND COMPETITIVENESS

Dani Rodrik recently published a post entitled How Ireland does it, where he cited an article from The New York Times about the competitive and growing entrepreneurship in Ireland. The article emphasized the combination of pro-growth economic policy, economic liberalization and tax cuts that empowered the growth of innovative and competitive entrepreneurship.

The central question concerning the economic policy is whether government agencies such as Enterprise Ireland really support growth and innovation or do they actually present a barrier to the entrepreneurial edge. There has been different evidence in different countries. The answer to this particular question rather depends on the size of government spending as a share of the GDP. For example, Ireland is known for restrictive fiscal policy, low corporate tax rate and low public spending while countries in continental Europe have had quite different experience. In Slovenia, public spending equals almost 50 percent of the entire output and public administration accounts for a considerable part of the GDP. In fact, cuts in public spending revived Ireland's "the-sickest-and-poorest-of-the-rich" economy to become a roaring Celtic tiger (link).

Different quantitative studies suggested that there is a positive correlation between the efficiency and quality of services provided by public administration and low public spending. The empirical evidence has confirmed that the inefficiency of services provided by the public administration strongly correlates with oversized and inadequate staff with poor track on productivity performance.

There is hardly any externality that could justify the existence of government agencies as information providers. True, the coordinative, productive and cooperative government inputs are essential to the core public products such as the rule of law, sound regulatory environment and administrative quality. New economy and the age of IT have succinctly eliminated a large slice of the information asymmetry and markets can successfully provide the needed information to entrepreneurs and start-up companies.

Should government agency support R&D activities at the university and at the company level. Again, it depends on behavior. Cooperative behavior may definitely enhence the efficiency of such incentives while rent-seeking behavior may definitely provide political incentives to manipulate with the information resulting in a growing rate of inefficiency.

The question is to which extent can government agencies such as Enterprise Ireland promote the entrepreneurship. First, it is important to rely on private-decision making instead of the enhencement of government ownership and intervention. Second, competitiveness is a microeconomic phenomena that emerges from the product and service quality of the companies competing on a rock-bottom incentive to provide the largest possible quantity and the lowest possible price. Third, the ultimate way to promote the entrepreneurship is the economic policy. Restrictive fiscal policy, lower public spending, product market deregulation, administrative reforms, tax cuts and the liberalization of the productive capacity, the rule of law and efficient institutions provide important incentives to launch the productive behavior such as saving, investment, labor supply and entrepreneurship nonetheless.

There is also a doubt whether public funds are truly as efficient as the conventional wisdom claims. Honestly, the best and most attractive R&D projects are privately funded. Google Inc. has been started by Sergey Brin and Larry Page. Apple was started by Steve Jobs, Jerry Yang started Yahoo.com and Pierre Omidyar succeeded with eBay without government funds and public R&D programs. Also, cutting-edge innovation in pharmaceutics and life sciences is usually pioneered by providing private funds.

Rok SPRUK is an economist.

Copyright 2008 by Rok SPRUK

R&D AND INNOVATION

"R&D is like an ice-hockey game, If you bring on young players and don't give an opportunity to play, you lose them to the US." (link)

Mauri Pekkarinen, Finland's Minister for Trade and Industry

INDIA'S DRUG MARKET TO REACH $20 BN CAPITALIZATION BY 2015

Currently, the retail sales value of India's high-growing drug market is on the solid path to sustain sound growth of market capitalization. Financial times reports that Indian drug market is projected to reach a remarkable $20 billion USD net capitalized value by 2015. India, with an outstanding 8,4 percent growth rate driven by high-return investment infusions, outperforms the rest of the world as is estimated to grow by 7,8 percent in 2008 (link).

It is noteworthy that India's human capital sector is growing rapidly, with two universities among top 100 Asian universities (link). Significant gains in output growth reflect the India's composition of the GDP where services dominate 60,7 percent of the GDP.

The forecast is favorable for the drug market, implying a forecasted 12,3 percent growth rate annually. The mechanics behind the significant growth of drug market can be explained by both, supply and demand. On the side of demand; with regard to market preferences (utility functions), a growing income standard leads to a growing demand for specific drugs driven by high rates of chronical diseases in India.

On supply side, India's pharmaceutical industry is processing a sectoral and price convergence of productivity and product quality, leading to new varieties of product choice delivered on the market to improve the health-care conditions individually.

Private investment such as hospital chains can naturally generate greater revenue and profit as opposed to public hospitals, and consequently higher rate of overall market capitalization which is an important aspect of international sectoral competitiveness.

Even health insurance is expected to double by 2015. As a responding incentive, new insurance claims and joint-ventures (to reduce the risk of sufficent capital allocation) could further boost the volume of capitalization and the size of investment pouring into India's high-growing health-care sector. Openness to technological innovation is an important pre-condition for delivering external results to match-up the relationship of supply and demand in the market.

One of the questions is whether government should intervene the drug market and impose price controls? The imposition of price controls negativelly affects both, supply and demand, in the long run. In fact, if a national agency or some governmental body decides to fix the price of qualified drugs, it cannot reach supposed results due to the lack of supply information. If government officials decide to lower the price of genetic drugs where the elasticity of demand is prone to changes in price and quality, then lower price fixation would result in shortages of supply of generic drugs.

On the other side, the upward fixation of the price could result in an unsold surplus and the demand side would be denied the access to generic drug products due to higher price which obviously wouldn't match the demand precisely. The excess regulation of health insurance and subsidies attached to generic industry through hidden contract inversion, delivers negative results and side-effects nevertheless.