Analysis of the relationship between research grants and medical patents : are the number of medical patents dependent on NIH and NSF funding?

ii CHAPTER 1: INTRODUCTION 1 A. Basic research vs. Applied Research B. Knowledge spillover C. Contribution and hypothesis of this study 1 1 3 CHAPTER 2: LITERATURE REVIEW 5 A. Recent trends in medical research B. Flow of university knowledge C. Clusters and geographic localization D. Time and quality effects 5 7 8 10 CHAPTER 3: THEORETICAL MODEL 12 A. Rival vs. Excludable goods B. Included variables 12 12 CHAPTER 4: THE DATA 14 CHAPTER 5: EMPIRICAL MODEL 16 A. OLS regression B. Fixed effects specification regression and inclusion of statespecific research productivity parameter C. Two-Stage Least Squares (2SLS) regression 16 18 19 CHAPTER 6: ESTIMATION RESULTS 20 A. OLS regressions B. Fixed effects specification regressions C. Research productivity parameter inclusion regressions D. Two-Stage Least Squares regressions 20 21 22 23 CHAPTER 7: CONCLUSION 25 A. Summary of findings B. Policy implications C. Suggestions for future research 25 26 27 REFERENCES 28 APPENDIX: 31 Table 1: Descriptive Statistics 31 Table 2: OLS regressions 31 Table 3: Fixed effects regressions 32 Table 4: OLS regressions with productivity parameter 33 Table 5: Two-Stage Least Squares regressions 34 4 Undergraduate Economic Review, Vol. 4 [2008], Iss. 1, Art. 11 https://digitalcommons.iwu. edu/uer/vol4/iss1/11 1 CHAPTER 1: INTRODUCTION A. Basic research vs. Applied research Over the course of the past decade, there has been an astonishing increase in the amount of capital allocated to basic medical research organizations. The primary objective of basic research is to gain more comprehensive knowledge and understanding of general variables, not to create or invent something. Fundamental research, as it is also known, is considered exploratory and mostly driven by the researcher’s or researcher’s organizations’ interests and intuition (Moses et al., 2005). Basic research focuses on scientific principles and discoveries and is considered to be a precursor to developments in applied research. Applied research utilizes the discoveries of basic research to commercialize applications through patenting. The research is designed to solve practical problems of the modern world. For example, basic research allowed for the discovery of the relationship between electricity and magnetism while applied research created the invention of the integrated circuit, the key component in microprocessors. Basic research is typically funded through charitable associations and governmental agencies and performed at public institutions. In contrast, applied research is primarily funded through private organizations and conducted at private firms. B. Knowledge spillover In reality, however, there is a strong relationship between basic and applied research organizations in the form of knowledge spillover. Knowledge spillover is defined as the 5 Shah: Analysis of the Relationship Between Research Grants and Medical Published by Digital Commons @ IWU, 2008 2 transmission of knowledge to others beyond the intended boundaries (Fallah and Ibrahim, 2004). Within the past two decades, considerable interest in quantifying the spillover effects between the public and private research sectors has attracted more researchers. This measurement is important as the amount of knowledge spillover has an immediate impact on the firm's innovation efforts. In addition, firms may decide to free ride on other firm's research efforts if large spillovers are present. When an interviewer stated that Siemens, Europe's fifth largest enterprise in terms of employees, conducts little research and development, the CEO replied by stating, "We have installed listening posts around. " This free riders approach allows firms to benefit from research conducted outside their firm. From an individual firm's perspective, spillovers may create a disincentive effect for own research efforts, however large spillovers can increase the appropriation possibilities of other firm's knowledge. Because of these possibilities, researchers have focused on measuring the transmitted knowledge between firms (Kaiser, 2002). Knowledge spillovers which can be transformed to explicitly stated information such as a patent is called 'codified' knowledge (Kaiser, 2002). Therefore, for codified knowledge measurements, most researchers rely heavily on patent and patent citation data to observe the effect of geographic localization of knowledge spillover. Most researchers strongly suggest that knowledge spillovers are geographically localized and statistically significant. 6 Undergraduate Economic Review, Vol. 4 [2008], Iss. 1, Art. 11 https://digitalcommons.iwu. edu/uer/vol4/iss1/11 3 The knowledge spillover effect of medical research has received little attention. The research, whether basic or applied, is conducted to add to the overall knowledge in the field of medicine. Advancements in the medical field are responsible for significant benefits, such as vaccines and treatments, which result in increased longevity. While immense amounts of capital are invested into basic medical research, the size of the knowledge spillover to the private sector is still unknown. Estimating this relationship will allow for quantifying and further understanding the gains from publicly funded medical research. C. Contribution and hypothesis of this study In light of the medical research knowledge spillover effect, this thesis will measure the relationship between the investments made into the basic medical research sector and the resulting effect on medical-based patents, contingent on geographic localization within states. The idea behind this relationship is that public and private medical schools receive funding from governmental agencies, such as the National Institutes of Health (NIH), and utilize the funding for basic medical research. Due to knowledge spillovers, private firms and inventors use this information to conduct applied research measurable by the granting of medical patents. Observing the link between basic medical research and medical patenting allows for measuring the return to public funds spent on medical research. It is hypothesized that the larger the investments awarded to the medical sector, the greater the number of medical patents on a state-wide basis. Observing this relationship has important implications for modeling change, economic growth and science policies. It will also allow for more precise institutional and geographical 7 Shah: Analysis of the Relationship Between Research Grants and Medical Published by Digital Commons @ IWU, 2008 4 allocation of research grants for the purpose of achieving more medical innovations, thus advancing the field of medicine as a whole. 8 Undergraduate Economic Review, Vol. 4 [2008], Iss. 1, Art. 11 https://digitalcommons.iwu. edu/uer/vol4/iss1/11 5 CHAPTER 2: LITERATURE REVIEW A. Recent trends in medical research According to Moses et al. (2005), annual U.S. spending on medical research has doubled in the past decade from $37.1 billion in 1994 to more than $94 billion in 2003, an increase of 102%. Dr. Moses and colleagues determined this value by including the major sponsors of medical research: federal government, state and local governments, private not-for-profit entities including foundations, and the industry itself. Their research found that of the $94 million spent in 2003, 40% came from the public sector while 60% was funded privately. Relative proportions from all public and private sources have remained constant. This parallel growth of public and private spending suggests a strong interrelationship between the sources of funds and their use. The public sector consists of federal, state and local funding while the private sector includes private not-for-profit companies and industry support (pharmaceutical, biotechnology, and medical device firms). Moses et al. (2005) also report that the total medical research expenditures at universities and colleges were $19.6 billion for 2002, up from $10.7 billion in 1995. The Federal sector accounted for 64% of expenditures while institutional funds were responsible for the next largest share at 17%. Institutional funds include subsidy from physician practice income, endowments, and hospitals’ support of research. Moses et al. (2005) reports that of the $94 billion spending for medical research, the National Institutes of Health (NIH) and pharmaceutical companies contribute $26.4 billion, 28% of the total, and $27.0 billion, 29% of the total, respectively. Biotechnology 9 Shah: Analysis of the Relationship Between Research Grants and Medical Published by Digital Commons @ IWU, 2008 6 companies contribute $17.9 billion, about 19% of the total spending while medical device companies account for $9.2 billion, 10% of the total. The NIH is the largest federal funder of medical research. In 2005 alone, the NIH spent over $11.5 billion of their $28 billion budget in NIH awards to medical schools (Cech, 2005). The medical research industry is divided into three sectors: drug, biotechnology and medical device research. Of these, medical device researchers saw funds rise 264% in the past decade. In contrast, support for pharmaceutical innovations and biotechnology firms grew 89% and 98% respectively. A study done by Reuters (2005) reports that the additional dollars spent on medical research has yielded disappointing results with regards to pharmaceutical companies. There has been a significant lag in the development of new, useful drugs compared to research results produced by medical device and biotechnology industries. In response to the article by Moses et al. (2005), Woolley and Propst (2005) conducted a study and reported on the public mood to such an increase in research spending. A compilation of 70 state surveys and 18 national surveys found that more than half of Americans think that the U.S. should spend more on research while two-thirds of all Americans are willing to increase taxes to achieve this goal. A very high proportion of A