Research departments are common in top firms in the private sector. By research, it is meant to be the simple data gathering and processing, but rather the creation of original, innovative insights. AT&T famously had Bell Labs. Technology leaders from IBM to Microsoft to Amazon, Facebook, and Google have all funded basic research. Google has Google X, despite being located only a few miles from Stanford.

A strong research lab is a sign of company health and power. Conversely, the shrinking of the research department often signals the demise of the company. And, of course, the phenomenon is not confined to tech. The fact that these highly efficient companies choose to spend millions to support research departments reinforces the puzzle: Why not focus on engineering and application of knowledge and outsource the creation of fundamental knowledge, of primary research, to academia?

Many explanations have been suggested in the literature. One is prestige. Another is that to attract top, entrepreneurial staff, one needs to give them the freedom and independence associated with basic research. A further reason is that, occasionally, great things come out of these research departments that propel companies to the knowledge stratosphere and create enormous public goods. The transistor, laser, and UNIX are just a subset of Bell Labs’ storied achievements