International R&D spillovers and institutions

The empirical analysis in “International R&D Spillovers” [Coe, D., Helpman, E., 1995. International R&D Spillovers. European Economic Review, 39, 859-887] is first revisited on an expanded data set that we have constructed for the purpose of this study. The new estimates confirm the key results reported in Coe and Helpman about the impact of domestic and foreign R&D capital stocks on TFP. In addition, we show that domestic and foreign R&D capital stocks have measurable impacts on TFP even after controlling for the impact of human capital. Furthermore, we extend the analysis to include institutional variables. Our results suggest that institutional differences are important determinants of TFP and that they impact the degree of R&D spillovers. Countries where the ease of doing business and the quality of tertiary education systems are relatively high tend to benefit more from their own R&D efforts, from international R&D spillovers, and from human capital formation. Strong patent protection is associated with higher levels of total factor productivity, higher returns to domestic R&D, and larger international R&D spillovers. Finally, countries whose legal systems are based on French and, to a lesser extent, Scandinavian law benefit less from their own and foreign R&D capital than countries whose legal origins are based on English or German law.     

SCIENCE-BASED R&D IN SCHUMPETERIAN GROWTH

Firm success is often associated with the development of better products. Private firms undertake applied R&D seeking market advantage, by capitalizing on the freely accessible results of basic research. But unpatentable basic research often fails to address applied R&D open problems. What is the role of the incentives in improving the innovative performance of an economy by matching partially motivated public researchers to their mission? Sometimes government-funded research projects are mission-directed, and yet in many cases the public sector academics indulge in carrier-driven research. An innovation system where, as in the United States, basic research is also driven by patents implicitly sets an ex-post incentive to the researchers guided by invisible hand. For a public innovation system – like the European one – designing an incentive scheme to motivate public researchers is of key importance for fostering the performance of the economic system. This paper extends the Schumpeterian multisector growth model with vertical innovation by highlighting a link between the degree of 'targetness' of public research and aggregate innovation. A positive effect of social capital is also proved.     

Endogenous protection of R&D investments

Abstract .  We examine firms' incentives to protect their non-cooperative R&D investments from spilling over to competitors. We show that, contrary to findings in most of the literature, the lack of full appropriability can lead to an increase in R&D investments. Consequently, as long as the R&D spillovers are not too strong, firms decide to let their R&D knowledge flow. Since, as we show, welfare is higher when R&D spillovers are present, it follows that public policies that promote the dissemination of technological knowledge could be welfare-enhancing.     

On `indirect' trade-related R&D spillovers

An influential literature argues that trade promotes knowledge flows and technology transmission between trading partners. This literature focuses on `direct' research and development (R&D) spillovers which are related to the levels of R&D produced by the trading partners. In this paper, we argue that `indirect' trade-related R&D spillovers also take place between countries, even if they do not trade with each other. These `indirect' spillovers are associated with available rather than with produced levels of R&D. Our empirical results suggest that these `indirect' trade-related spillovers are at least as important as the `direct' ones, and strengthen the view that trade does matter for the international transmission of R&D. They also suggest that, due to the existence of these `indirect' effects, bilateral trade patterns are relatively less important determinants of the level of foreign R&D spillovers acquired through trade.     

Too little or too much R&D?

According to the first generation models of endogenous growth based on expanding product variety, the market economy unambiguously generates too little R&D. Later, by disentangling returns to specialization from the market power parameter, it was shown that with sufficiently low returns to specialization too much R&D can occur. The present paper takes a step further, disentangling the market power parameter from the capital share in final output. At a theoretical level this helps finding too much R&D as well. On the other hand, in view of the empirically realistic order of magnitude between the parameters, disentangling market power and capital share tends to diminish the scope for excess R&D. Finally, by differentiating between net and gross returns to specialization we demonstrate what drives the differing inefficiency results in this literature.     

Product market competition,R&D composition and growth

We revisit the relation between product market competition and leading-edge growth in a model where horizontal and vertical innovations simultaneously occur. We show that competition exerts an important effect on the composition of aggregate R&D (vertical versus horizontal). In fact, when product market competition gets more intense, a larger fraction of R&D is engaged in improving the quality of products; this occurs at the expense of a lower rate of horizontal innovation. This effect, which is absent in the basic endogenous growth model with only vertical innovations, may overturn the inverse relation between product market competition and leading-edge growth found in prior theoretical models.     

Technological convergence, R&D, trade and productivity growth

This paper analyses productivity growth in a panel of 14 United Kingdom manufacturing industries since 1970. Innovation and technology transfer provide two potential sources of productivity growth for a country behind the technological frontier. We examine the roles played by research and development (R&D), international trade, and human capital in stimulating each source of productivity growth. Technology transfer is statistically significant and quantitatively important. While R&D raises rates of innovation, international trade enhances the speed of technology transfer. Human capital primarily affects output through private rates of return (captured in our index of labour quality) rather than measured TFP.     

Anti-competitive conduct, in-house R&D, and growth

Incumbent firms have two basic possibilities to improve their competitive position in the product market: Investment in R&D and the creation of entry barriers to the disadvantage of potential rivals, e.g. through lobbying activities, campaign contributions, bribes or the adoption of incompatible technologies. This paper proposes a simple oligopoly model which raises the possibility that such anti-competitive conduct and R&D investment are complementary activities for incumbents. Consequently, an institutional framework or technological possibilities which encourage anti-competitive conduct, although impeding entry of potential rivals and accentuating standard oligopoly distortions, may foster R&D-based growth and welfare. However, this outcome is less likely if entrants exert technological spillover effects, e.g. through foreign direct investment. Stronger protection of intellectual property rights, although triggering anti-competitive conduct and thereby impeding market entry as well, is more likely to foster economic growth.     

Growth,R&D,and uncertainty

I develop and analytically solve the stochastic Romer model in which the creation of ideas is driven by a stochastic process. I show that higher uncertainty about R&D, through the reallocation effects of resources among sectors, slows down economic growth and deteriorates welfare. The results suggest that persistently high uncertainty tends to severely restrict the scope of sustained income growth.     

The Causality Between R&D And Investment

The aim of this paper is to investigate the relationship between R&D expenditure and investment in machinery and equipment in order to test for causality. New growth theory emphasises the role of R&D in creating blueprints needed to produce new capital goods implicitly assuming causality running from R&D to investment. Other recent studies using firm level data have investigated the relationship between innovative activity and investment in fixed capital. In this paper we use aggregate data from the US economy on R&D expenditure in the industrial sector and aggregate investment in machinery and equipment. Standard Granger causality tests, together with the Hsiao version, are then performed, showing that causality runs from R&D to investment. In addition we perform a cointegration analysis allowing a test of possible long-run feedbacks. This dynamic representation shows that any feedback between investment and R&D is only significant in the long run.     

Property rights protection and corporate R&D: Evidence from China

Following the recent literature on institutions and economic growth, we examine the effects of property rights protection on corporate R&D. Using a unique 2003 World Bank survey of over 2400 firms in 18 Chinese cities, we obtain the following findings: (1) property rights protection is positively and significantly related to corporate R&D activity (for both process and product R&D); (2) government services and helping hand are conducive to corporate R&D, while informal payments to government officials are not; and (3) government ownership of firms and direct appointment of CEOs are negatively associated with corporate R&D activities. We also find that corporate R&D is positively related to firm size, and access to finance, but negatively related to product market competition and firm age.     

R&D policy with layers of economic integration

This paper examines whether the optimal unilateral R&D policy for an open economy is a subsidy or a tax. It constructs a general equilibrium model with three successive layers of international integration: (a) trade in goods, (b) trade in technologies with international R&D spillovers and (c) internationally-coordinated R&D policy. Trade in technologies introduces the possibility that an R&D subsidy will have such strong, negative terms-of-trade effects that it harms domestic welfare. Numerical simulations of the OECD show this is a possibility for the US and Japan. With international R&D spillovers a domestic R&D subsidy may reduce domestic innovation.     

The struggle to survive in the R&D sector: Implications for innovation and growth

By allowing for investment activities by research and development (R&D) firms to prevent product obsolescence, we show that if legal patent protection is too strong, a higher R&D subsidy rate delivers insufficient investments for survival in the R&D sector, depressing innovation and growth in the long run.     

GROWTH, R&D AND WELFARE: THE ROLE OF PUBLIC POLICY

This paper analyzes the normative side of an R&D growth model in which market structure and growth are jointly determined in the equilibrium of a one‐sector economy under monopolistic competition. We find that a distortion in the allocation of R&D, namely the presence of technological spillovers between firms, generates two market failures: insufficient growth and excessive entry of firms. We show that this result is driven by the interplay between market structure and growth. A simple tax/subsidy scheme to support the efficient solution is proposed.     

Union structure and firms' incentives for cooperative R&D investments

Abstract .  We investigate the impact of alternative unionization structures on firms' incentives to invest on cost-reducing R&D and to form Research Joint Ventures (RJVs), in the presence of R&D spillovers. We show that if firms invest non-cooperatively and spillovers are low, R&D investments are higher under centralized rather than under decentralized wage-setting. In contrast, investments are always higher under decentralized wage-setting in the case of RJVs. Firms' incentives to form an RJV are stronger under centralized wage-setting if and only if spillovers are low enough. Finally, centralized wage-setting may hinder the formation of costly RJVs and their potential welfare benefits.     

Technology clubs, R&D and growth patterns: Evidence from EU manufacturing

This paper investigates the forces driving output change in a panel of EU manufacturing industries. A flexible modeling strategy is adopted that accounts for: (i) inefficient use of resources and (ii) differences in the production technology across industries. With our model we are able to identify technical, efficiency, and input growth for endogenously determined technology clubs. Technology club membership is modeled as a function of R&D intensity. This framework allows us to explore the components of output growth in each club, technology spillovers and catch-up issues across industries and countries.     

Product differentiation, process R&D, and the nature of market competition

We investigate the relationship between process and product R&D and compare the incentives for both types of R&D under different modes of market competition (Bertrand versus Cournot). It is shown that: (i) process R&D investments increase with the degree of product differentiation and firms invest more in product R&D when they can do process R&D than when they cannot; (ii) Bertrand firms have a stronger incentive for product R&D whereas Cournot firms invest more in process R&D; and (iii) cooperation in product R&D promotes both types of R&D relative to competition whereas cooperation in both types of R&D discourages R&D relative to cooperation in just product R&D.     

Testing a model of UK growth: A role for R&D subsidies

R&D is a main driver of growth, whether by generating new ideas for production or increasing technological transfer. However, R&D itself is risky and faces numerous barriers which may reduce its marginal return. Direct R&D subsides are intended to counteract such barriers, but whether they lead empirically to increased economic growth is unclear. In our structural model of the UK, subsidies offset the frictional costs associated with R&D, incentivising innovation and so stimulating productivity growth. We estimate and test this structural model by indirect inference, a method not previously used in work on R&D. We find that even temporary cuts to R&D funding have long-lasting impacts on UK economic growth. The power of the test allows us to calculate tight accuracy bounds for our results and for policy reform impacts calculated using the model. These findings are of high relevance to the ongoing debate around the future UK innovation environment.     

Indeterminate equilibrium growth with product and R&D spillovers

The paper revisits an endogenously growing economy à la Romer (1990) to explore the possibility of local and global indeterminacy where, along with the usual R&D spillover, a manufacturing sector generates a product spillover on R&D. When the product spillover facilitates R&D, the dynamic market equilibrium is unique and determinate. However, when the product spillover is strongly negative on R&D, multiple balanced market equilibria emerge and are therefore globally indeterminate. Furthermore, global indeterminacy coexists with local indeterminacy under the joint condition on the intertemporal elasticity of substitution of consumption. Local indeterminacy also emerges when the product spillover is mildly negative in tandem with a high intertemporal elasticity of substitution. Hence, a dynamic market economy with product spillovers in the R&D sector enriches the understanding of observable growth phenomena, including business and growth cycles and income and growth disparity, among countries with the same economic fundamentals.     

The impact of public R&D expenditure on business R&D*

This paper attempts to quantify the aggregate net effect of government funding on business R&D in 17 OECD Member countries over the past two decades. Grants, procurement, tax incentives and direct performance of research (in public laboratories or universities) are the major policy tools in the field. The major results of the study are the following: Direct government funding of R&D performed by firms has a positive effect on business financed R&D (except if the funding is targeted towards defence activities). Tax incentives have an immediate and positive effect on business-financed R&D; Direct funding as well as tax incentives are more effective when they are stable over time: firms do not invest in additional R&D if they are uncertain of the durability of the government support; Direct government funding and R&D tax incentives are substitutes: increased intensity of one reduces the effect of the other on business R&D; The stimulating effect of government funding varies with respect to its generosity: it increases up to a certain threshold (about 10% of business R&D) and then decreases beyond; Defence research performed in public laboratories and universities crowds out private R&D; Civilian public research is neutral for business R&D. * We thank the participants to various seminars, including the OECD Committee for Scientific and Technology Policy and the NBER 2000 Summer Institute on Productivity for helpful comments and suggestions. All opinions expressed in this article are those of the authors and do not reflect necessarily the views of the OECD or Université Libre de Bruxelles.