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Fed Reviews R&D and Location Decisions of Pharmaceuticals

November 08, 2004

What policies, investments and programs would be most effective for communities trying to attract, retain or build a local pharmaceutical industry? Research parks? Tax incentives? Biotech seed capital funds?

The answers one gets will vary, but using historical data on patent activity and observing the location of the largest pharmaceutical companies, a group of researchers suggests investments in academic R&D that lead to publications is not a bad place to start.

While earlier research has shown the U.S. biotech industry has grown around "star" researchers, (see Intellectual Capital and the Birth of U.S. Biotechnology Enterprises, for example), a working paper summarized in the latest Economic Paper from the Federal Reserve Bank of San Francisco (FRBSF) finds "exposure to an additional 1,000 scientific papers authored in a locality by individuals at public institutions has about the same effect on a firm's patent count as an additional $1 million of R&D expenditures."

Alternately, "proximity to the labs of competing drug firms that are publishing many scientific papers does not provide a similar boost to productivity -- in fact, the measured effect is negative."

The FRBSF Economic Paper highlights the issues discussed in the working paper, offers a layman's definition of knowledge spillovers, and presents the research findings and policy implications from the paper. The authors caution that the research is based on pre-Internet patent activity and location decisions. The effect of the Internet, which makes access to published research information much easier, is not captured in the results of the research paper. Similarly, the influences of recent trends in academic institutions increasingly to patent their research, instead of publish all of the results, are not examined.

The four-page Does Locale Affect R&D Productivity? The Case of Pharmaceuticals is available at: http://www.frbsf.org/publications/economics/letter/2004/el2004-32.html

The longer Public & Private Spillovers, Location and the Productivity of Pharmaceutical Research can be downloaded from: http://www.duke.edu/~mkyle/Spillovers%20Location%20Productivity%20-%20Sept-04.pdf