The take of innovation economists on the COVID-19 crisis
Gaétan de Rassenfosse, Dominique Foray, George Abi Younes, Charles Ayoubi, Omar Ballester, Gabriele Cristelli, Patrick Gaulé, Gabriele Pellegrino, Matthias van den Heuvel, Elizabeth Webster, Ling Zhou 06 May 2020
Alongside its direct harmful effects on health, the COVID-19 outbreak is showing its first negative economic repercussions, which are bound to be very large (Baldwin and Weder di Mauro 2020). The lockdown measures implemented worldwide to stop the virus spreading have halted a significant portion of global economic activities, starting a recession whose severity and length are difficult to predict. The recession calls for a coordinated response that covers, among other things, fiscal, monetary, and social dimensions (Benassy-Quéré et al. 2020, Bofinger et al. 2020). Science, technology and innovation (STI) policy also has a key role to play in understanding the crisis and finding a way out.
Well-known reasons for systematic underinvestment in vaccine research
Government support for research and development (R&D) is critical, especially when it comes to vaccines. R&D entails significant externalities that are difficult to capture by the private innovator. The gap, sometimes considerable, between social and private rates of return to inventions results in significant underinvestment in R&D. This market failure is not specific to vaccine R&D, but it applies very strongly to this case. Harvard economist Michael Kremer provides an additional set of reasons for the underinvestment in vaccine research (Kremer 2000, Kremer and Snyder 2015). Vaccines are an under-consumed economic good, not only due to the positive externality arising from being vaccinated but also because consumers seem much more willing to pay for treatment than for prevention. These reasons explain why potential vaccine developers lack incentives to invest in R&D. Indeed, few companies are active in this domain. Novartis’ large vaccine division was sold to GSK in 20141 because it was incurring losses, leaving only five major players on the vaccine market.2
There is therefore a strong case for government support. However, if the world as a whole would be better off with public support for vaccine R&D, this is not necessarily true for individual countries. National governments maximise domestic welfare, not global welfare. Vaccine R&D is a global public good – each country has an incentive to free-ride on research financed by foreign countries. The same argument applies to environmental policy (e.g. Rodrik 2014).
Opportunely, all these market failures have dissipated for SARS-CoV-2. Millions, if not billions, of people demand access to a vaccine, and a significant fraction of consumers are willing to pay a higher price than the manufacturing cost. Furthermore, governments’ massive injections of research money have also contributed to eliminating market failures. For example, the National Institutes of Health (NIH) alone has received $1.8 billion.3 Competition across countries to be the first to have access to new vaccines also mitigates the free-rider problem and strengthens R&D incentives.
Thoughts on possible STI policy reactions
Are we wasting public money?
Substantial financing has been directed towards SARS-CoV-2 research. Given the many demands on the public purse, is it wise to invest so much public money on this?
In the short run, only a subset of researchers have the right human capital to advance the knowledge frontier in any specific area.4 In essence, there are a limited number of brains that money can buy. Work by Kyle Myers (forthcoming) on the ‘elasticity of science’ with respect to targeted funding suggests that switching costs of science are high. Human capital inadequacy is not the only barrier – good research ideas may also be scarce. In a world of scarce ideas, increasing funding invariably leads to diminishing returns (see also Bloom et al. 2020). Finally, the unmet medical needs of yesterday have not gone away, and pharmaceutical innovation for all sorts of other diseases is still needed, calling for a cautious reallocation of research efforts.
The previous considerations suggest that reallocating vast amounts of funding to SARS-CoV-2-related research could be wasteful. However, they should also be taken with caution. The scarcity of ideas may be a factor, but the current virus is still very new. Therefore, we may be far from diminishing returns kicking in. Furthermore, the human capital constraint is mitigated by the fact that a wide range of innovations is useful to fight COVID-19, from vaccines and medical equipments to testing solutions. While immunologists advance on vaccines, microbiologists can work on testing and engineers on developing protective equipments and ventilators.
Although the optimal level of SARS-CoV-2 public research support is unclear, there are ways to increase the returns to R&D investments. In particular, openness, in the form of quick sharing of data and findings, should be strongly encouraged, for it limits duplication of R&D and accelerates the identification of unfruitful technological paths.
Not the time for mission-oriented R&D policy
The current innovation imperative of finding a vaccine very quickly and at any cost seems to represent a strong case for allocating resources according to a ‘mission-oriented R&D’ (MOR) policy, similar to the Manhattan Project in the 1940s. Such policies are characterised by a high level of centralisation and intentionality (there is a well-defined technology target) and a limited set of agents that are involved: the state is both the funder and the customer, and some public agencies are performing the R&D operations. MOR has been mostly deployed in defense and space sectors and has delivered significant results in terms of goal achievement (e.g. inventing the atomic bomb) within a rather short time. MOR thus seems like an appropriate approach in any crisis time when a particular ‘technological fix’ is needed urgently (Sarewitz and Nelson 2008). Nevertheless, MOR comes with a significant drawback: the lack of organisational diversity and freedom to experiment, which is a crucial engine for innovation (Rosenberg 1992).
This drawback explains why the life sciences ecosystem has never worked under such a MOR principle (Cockburn et al. 2011). The success of the life science innovation system has been driven on the one hand by intellectual freedom, scientific openness and opportunities for experimentation and diversity at the level of individuals and institutions, and on the other hand by an intense and pervasive competition throughout the value chain in life science. Life science innovation, therefore, does not go well with a command-and-control approach.
What we are observing today as a reaction to the pandemic crisis is not the creation of a new Manhattan Project, but rather a proliferation of a wide range of responses by a complex set of institutions and actors. This organisation maintains and promotes intellectual freedom, scientific openness, and decentralised competition at all stages of the research and product development process. As policy guidance for future health crises, the current response of the system is probably a better solution than what could be organised under a MOR principle.
Compulsory patent licensing as a credible threat to encourage broad access
The worry that patents may be a barrier in the fight against COVID-19 is a legitimate concern. After all, a patent is a temporary monopoly right granted to an inventor that allows her to exclude others from using, making, and selling the protected invention. Excluding others from using bright ideas may seem counterproductive in present times.
The issue is real. BioFire Diagnostics, a medical device firm based in the United States, was recently sued by Labrador Diagnostics for patent infringement.5 US pharmaceutical company Gilead took several steps suggesting they were ready to enforce their patent rights related to COVID-19 candidate drug Remdesivir.6 At the other end of the spectrum, a couple of patent holders have already given up patent rights or granted free licenses to relevant patents. For instance, US drugmaker AbbVie is reportedly waiving its right to exclusivity over patent-protected Kaletra,7 a combination of the antivirals lopinavir and ritonavir currently being tested as a treatment for coronavirus.
Private firms are under intense public pressure to act responsibly by not using their patents aggressively. If voluntary contributions fail, governments should step in and force patent holders to share their inventions using so-called ‘compulsory licensing’ provisions. Clearly, the first-best solution would be for private actors to act responsibly by providing broad and affordable access to tests, drugs, and vaccines. Government intervention is undoubtedly an option to consider – if only because the threat of compulsory licensing encourages patent holders to act responsibly.
Authors’ note: This column relies on a paper entitled “COVID-19: Insights from Innovation Economists,” which has been written by a collective of scholars primarily associated to the College of Management of Technology at EPFL, under the supervision of Profs Dominique Foray and Gaétan de Rassenfosse. The full paper is available at https://ssrn.com/abstract=3575824.
Baldwin, R and B Weder di Mauro (2020). Economics in the Time of COVID-19. A VoxEU. org Book, CEPR Press.
Benassy-Quéré, A, R Marimon, J Pisani-Ferry, L Reichlin, D Schoenmaker, B Weder di Mauro (2020) “COVID-19: Europe needs a catastrophe relief plan,” VoxEU.org, 11 March.
Bloom, N, C I Jones, J Van Reenen and W Webb (2020), “Are ideas getting harder to find?”, American Economic Review 110(4): 1104–1144.
Bofinger, P, S Dullien, G Felbermayr, C Fuest, M Hüther, J Südekum and B Weder di Mauro (2020), “Economic implications of the COVID-19 crisis for Germany and economic policy measures,” in R Baldwin and B Weder di Mauro (eds), Mitigating the COVID economic crisis: Act fast and do whatever it takes, a VoxEU.org eBook, CEPR Press.
Cockburn, I M, S Stern and J Zausner (2011), “Finding the Endless Frontier: Lessons from the Life Sciences Innovation System for Energy R&D”, in Accelerating Energy Innovation: Insights from Multiple Sectors (pp. 113–157), University of Chicago Press.
Foray, D, G de Rassenfosse et al. (2020), “COVID-19: Insights from Innovation Economists”.
Kremer, M (2000), “Creating Markets for New Vaccines Part I: Rationale”, NBER Working Paper No 7716.
Kremer, M and C M Snyder (2015), “Preventives versus treatments”, The Quarterly Journal of Economics 130(3): 1167–1239.
Myers, K (forthcoming), “The Elasticity of Science”, American Economic Journal: Applied Economics.
Rodrik, D (2014), “Green industrial policy”, Oxford Review of Economic Policy 30(3): 469–491.
Rosenberg, N (1992), “Economic experiments”, Industrial and Corporate Change 1(1): 181–203.
Sarewitz, D and R Nelson (2008), “Three rules for technological fixes”, Nature 456(18): 871–872.