Final answer:
The likelihood of firms internalizing R&D is context-dependent, and without external benefits, firms might underinvest in R&D due to limited private benefits compared to broader social benefits. Governments often provide incentives to encourage firm investment in R&D to achieve positive externalities for society.
Step-by-step explanation:
The statement that "The likelihood of a firm internalizing research and development instead of outsourcing it is low." can be either true or false, depending on various factors influencing a company's strategy. However, when considering the broader question of whether private firms will underinvest in research and development (R&D) in a market economy due to the presence or absence of external benefits, we enter into a more nuanced discussion.
Without external benefits, the demand for borrowing and investing in R&D may be lower because the firm will only receive the private benefits of their investment, missing out on the potential additional benefits that spill over to society or other companies. These positive externalities contribute to the overall social benefits of an innovation, which can lead to an underinvestment in R&D by private firms if they cannot capture all the returns from their investment. This is because they are not incentivized to invest in something that benefits others beyond their firm without some compensation or incentive.
To address this underinvestment, governments might provide incentives to private firms, motivating them to embark on investment or R&D projects that they otherwise might neglect. By doing so, governments enable the diffusion of new technologies and innovations which have positive impacts on society as a whole, extending beyond the private profits of individual firms.