Effectiveness versus Efficiency: Growth-Accelerating Policies in a Model of Growth without Scale Effects

Abstract. Recent R&D growth models without strong scale effects imply that long-run growth rates depend only on parameters that are usually taken to be exogenous. However, integrating human capital accumulation into models of this type, Arnold (2002) demonstrates that subsidizing education accelerates growth. The present paper addresses welfare issues in Arnold's model. The main theoretical finding of the paper is that a system of subsidies that implements the optimal balanced growth path as a decentralized equilibrium includes zero subsidies to education, while R&D activity should be either subsidized or taxed. To shed further light on the latter result, the model is calibrated and it turns out that along the balanced growth path, the decentralized economy underinvests in R&D, i.e. R&D activities should be subsidized.     

NON‐SCALE EFFECTS OF INTERNATIONAL TECHNOLOGICAL‐KNOWLEDGE DIFFUSION ON SOUTHERN GROWTH AND WAGES

We develop a dynamic, general equilibrium non‐scale endogenous growth model of North–South technological‐knowledge diffusion by imitation. Countries differ in levels of exogenous productivity, human‐capital levels and R&D capacity. Growth is driven by Northern innovative R&D and the South converges towards the North. Growth is also driven by human‐capital accumulation, scale effects are removed, imitation is only feasible once a threshold distance to the frontier has been attained and is dependent on the South's relative level of employed human capital and on domestic policies promoting R&D. Imitation promotes partial convergence of inter‐country wages and governs the path of intra‐South wage inequality.     

Human Capital and Overinvestment in R&D*

We introduce a negative effect of technological development on human capital accumulation in a growth model with endogenous innovation and accumulation of human capital. This implies a negative externality of R&D in human capital accumulation. Some calibration exercises suggest that this distortion may be sufficiently strong not only to offset the usual effects of spillovers and of returns to specialization but also to induce overinvestment in R&D.     

THE MECHANICS OF ECONOMIC GROWTH THROUGH CAPITAL ACCUMULATION AND TECHNOLOGICAL PROGRESS*

This study develops a model wherein capital is used in final goods production and research and development (R&D) activities. This arrangement generates changes of the equilibrium capital allocation corresponding to capital endowment, which engenders a regime change from capital based growth with decreasing returns to R&D based perpetual growth. These two growth phases account for the polarization of economies. The model also engenders multiple equilibria on capital allocation—which emerge during the middle stages of capital accumulation—accounting for leapfrogging and the instability of the economic growth of developing countries with medium capital accumulation.     

On the effects of human capital and R&D policies in an endogenous growth model

We introduce an external effect of existing technologies in human capital accumulation in an endogenous growth model and describe its steady-state and transition. We numerically solve the model to compare the quantitative effects of R&D policy with the quantitative effects of human capital policy in wealth and welfare. Although R&D subsidies have now an overall positive effect on growth, wealth and welfare, the calibration exercise shows that for plausible values for the parameters, human capital policy is simultaneously the most income and welfare-improving and the less expensive to the government.     

R&D Policies and Endogenous Growth: A Dynamic General Equilibrium Analysis of the Case for Canada*

This paper utilizes a general equilibrium R&D model of endogenous growth via increasing capital variety to examine the impact of alternative policies on productivity and economic growth. The model is calibrated using data from the Canadian economy. Findings reveal that direct incentives such as subsidies to R&D activities would have the highest productivity impact on the Canadian economy, that an increase in subsidies to the users of R&D capital (output) would have a positive but smaller impact, and trade liberalization would have minimal effects on productivity growth via its impact on international R&D spillovers.     

The Role of Human Capital and Population Growth in R&D‐based Models of Economic Growth*

Human capital accumulation is introduced in a growth model with R&D‐driven expansion in variety and quality of intermediate goods and knowledge spillovers from both research activities. Economic growth is no longer uniquely tied to population growth as previous growth models without scale effects suggest. The model predicts that economic growth depends positively on the rate of human capital accumulation and positively or negatively on population growth and is therefore supported by empirical evidence to a greater extent than previous models. In particular, long‐run growth is compatible with a stable population.     

Dynamical analysis of the R&D-based growth model with a regime switch

Several empirical studies suggest that advanced economies experience a growth regime switch from factor accumulation to knowledge accumulation. To investigate the mechanism of such a regime switch, this study develops a concise and flexible dynamic model based on Romer (J Polit Econ 98:S71–S102, 1990) by introducing two types of endogenously supplied R&D input capital. The model replicates the growth patterns of developed and underdeveloped nations, clarifies the important role that capital plays in the difference between them, and presents several implications for interest-rate subsidies and official development assistance. Further, it shows that if a country enjoying long-run growth has little initial capital, its initial economic development will be based on capital accumulation. When the capital stock becomes sufficient for supporting R&D, the economy will achieve long-run growth through R&D.     

Population and Economic Growth Under Different Growth Engines

Using a growth model with physical capital accumulation, human capital investment and horizontal R&D activity, this paper proposes an alternative channel through which an increase in the population growth rate may yield a non‐uniform (i.e., a positive, negative, or neutral) impact on the long‐run growth rate of per‐capita GDP, as available empirical evidence seems mostly to suggest. The proposed mechanism relies on the nature of the process of economic growth (whether it is fully or semi‐endogenous), and the peculiar engine(s) driving economic growth (human capital investment, R&D activity, or both). The model also explains why in the long term the association between population growth and productivity growth may ultimately be negative when R&D is an engine of economic growth.     

The role of diminishing returns in neo-Schumpeterian growth theory

Summary. This paper generalizes Segerstrom [5], a dynamic general equilibrium model of endogenous growth through quality improvements in which innovation and imitation are modeled as the outcomes of research and development (R&D) races. Specific factors introduced into the technologies of both R&D activities achieve diminishing returns to scale in R&D. The comparative-static results of subsidies to R&D activities depend on the degree of diminishing returns to scale in R&D. When there is (is not) a sufficient degree of diminishing returns to R&D, a subsidy to innovative activity increases (decreases) innovative activity. Received: July 8, 1994; revised version: June 9, 1997     

Environmental regulations and innovation activity in UK manufacturing industries

We examine the relationship between environmental regulations and innovation, using data from UK manufacturing industry during 2000-2006. We estimate a dynamic model of innovation behaviour, and explicitly account for the likely endogeneity of our measure of the stringency of environmental regulations (pollution abatement costs). Our results indicate that while on the one hand environmental R&D and investment in environmental capital are stimulated by greater pollution abatement pressures, on the other hand there is not a positive impact of environmental regulation on total R&D or total capital accumulation. We find some evidence that this is because more stringent environmental regulations directly lower the optimal expenditure on non-environmental innovations. In addition, we find that environmental R&D may crowd out non-environmental R&D, although there is no evidence that environmental capital crowds out non-environmental capital.     

Experiencing change and the evolution of adaptive skills: Implications for economic growth

We distinguish learning in a static environment from that in a dynamic environment to show the existence of an important interaction between the development of new technologies and human capital accumulation. Because technological progress creates a more dynamic environment, it complements education in the production of human capital by enhancing adaptive skills. Higher levels of adaptability and human capital in turn determine the profitability of new inventions and the incentive to invest in new R&D. Differences in the history of technological progress produce different levels of adaptability and our results suggest why countries that have comparable levels of education and per capita incomes may differ significantly in their growth performance.     

The role of human capital and innovation in economic development: evidence from post-Malthusian Prussia

The effect of human capital on growth involves multiple channels. On the one hand, an increase in human capital directly affects economic growth by enhancing labor productivity in production. On the other hand, human capital is an important input into R&D and therefore increases labor productivity indirectly by accelerating technological change. In addition, different types of human capital such as basic and higher education or training-on-the-job might play different roles in both production and innovation activities. We merge individual data on valuable patents granted in Prussia in the late nineteenth-century with county-level data on literacy, craftsmanship, secondary schooling, and income tax revenues to explore the complex relationship between various types of human capital, innovation, and income. We find that the Second Industrial Revolution can be seen as a transition period when it comes to the role of human capital. As in the preceding First Industrial Revolution, “useful knowledge” embodied in master craftsmen was related to innovation, especially of independent inventors. As in the subsequent twentieth century, the quality of basic education was associated with both workers’ productivity and firms’ R&D processes. In a final step, we show that literacy had also a negative effect on fertility which increased with innovation. In general, our findings support the notion that the accumulation of basic human capital was crucial for the transition to modern economic growth.     

R＆D、R＆D溢出、内生增长和内生收敛

根据强调知识与技术创新、知识与技术溢出重要性的当代内生增长理论，本文建立了一个将R＆D和R＆D溢出与资本积累之间、R＆D和R＆D溢出与总产出增长之间直接关联起来的动态模型。面板数据协整检验实证分析结果表明R＆D和R＆D溢出与资本积累之间、R＆D和R＆D溢出与总产出增长之间分别存在显著的正面长期协整关联。进一步的分析表明，R＆D与资本积累之间、R＆D与总产出增长之间分别存在显著的长期双向格兰杰因果关系。由此观知，R＆D乃长期经济增长源泉之所在。另一方面，尽管资本积累或总产出增长并不格兰杰导致R＆D溢出，证据表明R＆D溢出格兰杰导致资本积累和总产出增长。这种由R＆D溢出到资本积累和总产出增长的单向格兰杰因果关系意味着尽管知识与技术的跨国传播并非必然发生。其实为世界经济增长的重要动力。     

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.     

The driving forces behind China’s growth1

The main objective of this article is to disentangle the determinants of the Chinese economic growth that occurred from 1965 to 2000. We have explored, first, the time series properties of the growth rates of gross domestic product and labour productivity with an extended battery of unit‐root tests. Then, in a multivariate setting, we use the VAR model methodology to provide evidence that physical and human capital accumulation, R&D expenditure, openness and competitiveness are the main drivers of output, labour productivity and total factor productivity growth in the long run. Additionally, we also show that although China has not yet converged to its long‐run equilibrium, it is in the process of catching up. These results are more consistent with some versions of the endogenous growth models than with Solow‐type models of growth, since they support active strategies of economic policy to stimulate economic growth and catching up with more advanced economies.     

Non‐Scale Endogenous Growth with R&D and Human Capital

This paper examines the conditions under which increasing knowledge, encapsulated in ideas for new technology through R&D and embodied in human capital through education, sustains economic growth. A general model is developed where, consistent with recent literature, growth is non‐scale (not increasing in population size) and endogenous (generated by factors within R&D and education). Recent models feature the counterfactual assumption of constant returns to existing knowledge and restrict the substitutability of inputs within R&D and education. We find that non‐scale endogenous growth is possible under less stringent conditions. The findings reconcile sustained economic growth with evidence of diminishing marginal returns in education and R&D, which suggests an ambiguous role for R&D policy.     

Growth and optimal policies in an R&D-growth model with imperfect international capital mobility

In this paper, we examine the effects of international capital mobility on innovation, growth, and optimal growth policies in a small open economy with R&D-driven growth. Households can borrow funds from an imperfect international capital market to finance their investment in R&D firms. We show that the economy can reach a higher growth rate if international capital is more mobile. This result is consistent with recent empirical findings. Moreover, we show that the common growth-enhancing policies, such as patent protection and the R&D subsidies, have an additional negative welfare effect when households can access the international capital market. Accordingly, the optimal patent protection and R&D subsidy should be smaller when the degree of international capital mobility is higher.     

International talent inflow and R&D investment: Firm-level evidence from China

Using firm-level R&D data with regional international talent data, we find that international talent increases the R&D investment of Chinese manufacturing firms, a result that is further confirmed with patent data and under a number of robustness checks. These findings stem from two mechanisms: international talent boosts human capital accumulation and provides a diversified labor force. Further, the R&D promoting effect is stronger if firms are located in eastern China rather than in other regions, of small and medium-sized rather than large-sized, of domestic ownership rather than foreign ownership. The policy implication is, the introduction of international talent can be a new way to promoting R&D investment, especially for skilled-labor constrained countries.     

Informality and Long‐Run Growth

One of the most salient features of developing economies is the existence of a large informal sector. In this paper, we use quantitative theory to study the dynamic implications of informality on wage inequality, human capital accumulation, child labor, and long‐run growth. Our model can generate transitory informality equilibria or informality‐induced poverty traps. Its calibration reveals that the case for the poverty‐trap hypothesis arises: although informality serves to protect low‐skilled workers from extreme poverty in the short run, it prevents income convergence between developed and developing nations in the long run. Then we examine the effectiveness of different development policies to exit the poverty trap. Our numerical experiments show that using means‐tested education subsidies is the most cost‐effective single policy option. However, for longer time horizons, or as the economy gets closer to the poverty trap threshold, combining means‐tested education and wage subsidies is even more effective.