Government Intervention in Case of (Financial) Market Failure

From a micro-economic perspective, three basic market imperfections lead government to intervene in case of space technologies (Rose 1986) and these seemingly apply to the aircraft industry as well.

Firstly, the inability of the capital market to finance R&D. Although fundamental research of aircraft technology may well take place at universities or (private) institutions, the development (beyond possibly a pilot product) and commercialization typically does not. Entrepreneurs looking for private capital may fail to find the necessary financial means because of the relatively low return on invested capital due to high risks involved (caused by technological and market uncertainty), the high fixed costs, and the long lead times or payback period. Arguably, with increasing complexity, development costs go up, and government intervention and financial support become more important.

Secondly, the non-appropriability of research output. Given that fundamental principles and basic R&D are generally public goods, benefits from developments are (to a certain extent) non-patentable and thus non-appropriable. Moreover, as much of the technological knowledge is embodied in the technology produced, there is a real risk of reverse engineering. Commercial competitors and rivaling countries may be lurking to leapfrog the first mover. This non-appropriability may thus discourage initial investments. Particularly with regard to military technology, governments may need to fear reverse engineering, technology espionage, scouting for (or: defecting) lead scientists or engineers, etc. Interestingly, exactly the spillovers may stimulate entry, competition and thereby further innovation, development, and commercialization (Kotha 2010). While this may already be the case within the same industry, there is also spillover to (the formation of) other industries, which adds to the arguments in favor of government support.

Thirdly, industry distortions, e.g. pending or prior regulations or policies. Security or health requirements or institutional frameworks in place may make investors reluctant to finance innovations. Aircraft design and components have to comply with type certificates, following guidelines of certification agencies.

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