The past and future of knowledge-based growth

This paper consolidates two previously disconnected literatures. It integrates R&D-based innovations into a unified growth framework with micro-founded fertility and schooling behavior. The theory suggests a refined view on the human factor in productivity growth. It helps to explain the historical emergence of R&D-based growth and the subsequent emergence of mass education and the demographic transition. The model predicts that the erstwhile positive correlation between population growth and innovative activity turns negative during economic development. This “population-productivity reversal” explains why innovative modern economies are usually characterized by low or negative population growth. Because innovations in modern economies are based on the education of the workforce, the medium-run prospects for future economic growth—when fertility is going to be below replacement level in virtually all developed countries—are better than suggested by conventional R&D-based growth theories.     

Animal spirits and the composition of innovation

This paper shows that the Schumpeterian model with both vertical and horizontal innovative research admits many more equilibria than the unique symmetric balanced growth path (BGP) usually highlighted in the literature. Each of a continuum of BGPs is characterized by a different composition of aggregate R&D (vertical versus horizontal).This appears if firms expect self-fulfilling “waves of enthusiasm” in the newly introduced sectors, as is very common in the real world. Pioneers are challenged by more outsiders and the first monopoly of every new good is likely to last less than in more mature industries: By expecting this horizontal innovation is depressed while vertical innovation is more intense. Such “waves of enthusiasm” have a positive effect on growth rates and a negative effect on consumption levels.     

Do subsidies have positive impacts on R&D and innovation activities at the firm level?

In this paper we analyze whether and how “research” and “development” subsidies influence private R&D activity. Our empirical results show that “research” subsidies stimulate R&D spending within firms while “development” subsidies substitute such spending. At the theoretical level we find empirical support for the market failure argument that private R&D expenditure is best stimulated in areas where the gap between the social and the private rate of return to R&D is high. A policy implication is that technology programs should support research projects in the private sector in order to stimulate to more R&D.     

Dynamic analysis of outsourcing

This paper develops an R&D-based growth model and calibrates the model to aggregate data of the US economy to quantify a structural relationship between patent length, R&D and consumption. Under parameter values that match the empirical flow-profit depreciation rate of patents and other key features of the US economy, extending the patent length beyond 20 years leads to a negligible increase in R&D despite equilibrium R&D underinvestment. In contrast, shortening the patent length leads to a significant reduction in R&D and consumption. Finally, this paper also analytically derives and quantifies a dynamic distortionary effect of patent length on capital investment.     

INTELLECTUAL PROPERTY MEETS ECONOMIC GEOGRAPHY: GLOBALIZATION, INEQUALITY, AND INNOVATION STRATEGIES

I perform a Schumpeterian analysis of a world economy in which heterogenous individuals and firms endogenously respond to stronger global competition by undertaking more education and by spending more in research and development (R&D). A more globalized economy is predicted to exacerbate wage inequality, but to spur human capital accumulation within each country. However, despite its positive level effects on consumption and output, globalization can reduce each country's per-capita output growth rate. R&D specialization allows each country to positively invest in manufacturing, variety proliferation R&D, and product quality upgrading R&D. The existence of such an R&D specialization – jointly with domestic size – allows us to explain some different economic performance about inequality and R&D effort of developed regions, such as the US and the EU countries.     

Patent claims and economic growth

This study introduces a blocking patent on horizontal R&D into the endogenous growth model of Chu et al. (2012), which features a blocking patent on vertical R&D. Results show that strengthening patent protection on horizontal R&D promotes vertical innovation (quality improvement) but hinders horizontal innovation (variety expansion). This effect of a horizontal blocking patent on directionality of innovation is opposite to that of the vertical blocking patent analyzed by Chu et al. (2012). Results also show that under mild conditions, strengthening a blocking patent on horizontal innovation as well as on vertical innovation can increase economic growth and social welfare.     

R&D and economic growth: How strong is the link?

The present note examines the relationship between R&D outlays and economic growth in the OECD context and presents an argument, which confronted with data, cast doubts on the effectiveness of an innovation policy that attempts to improve aggregate productivity only based on increasing R&D intensity.     

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.     

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.     

Is Embodied Technology the Result of Upstream R&D? Industry-Level Evidence

This paper provides an exploratory analysis of whether data on the research and development (R&D) spending directed at particular technological/product fields can be used to measure industry-level capital-embodied technological change. Evidence from the patent literature suggests that the R&D directed at a product, as the main input into the “innovation” production function, is proportional to the value of the innovations in that product. I confirm this hypothesis by showing that the decline in the relative price of a good is positively correlated with the R&D directed at that product. The hypothesis implies that the technological change, or innovation, embodied in an industry's capital is proportional to the R&D that is done (“upstream”) by the economy as a whole on each of the capital goods that a (“downstream”) industry purchases. Using R&D data from the National Science Foundation, I construct measures of capital-embodied R&D. I find they have a strong effect on conventionally measured total-factor productivity growth, a phenomenon that seems to be due partly to the mismeasurement of quality change in the capital stock and partly to a positive correlation between embodied and disembodied technological change. Finally, I find the cross-industry variation in empirical estimates of embodied technological change accord with the cross-industry variation in embodied R&D. Journal of Economic Literature Classification Number: O3.     

Labor supply of elderly people,fertility, and economic development

Increases in life expectancy and the fertility rate have been observed as per-capita income increases in economically developed countries with high per-capita income. We explain these observations using a synthetic economic model with endogenous lifetime, retirement, and human capital accumulation. In contrast to the result obtained by assuming an institutionally fixed and compulsory retirement, a longer life expectancy attributable to rises in per-capita income can induce elderly people to leave the labor market later, thereby enabling them to increase consumption of goods as well as “children” when young. Consequently, higher per-capita income can be associated with higher fertility.     

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.     

Occupational choice and entrepreneurship: effects of R&D subsidies on economic growth

Most R&D-based growth models fail to explicitly account for the role of entrepreneurs in economic growth. By contrast, this study accounts for this factor and constructs an overlapping-generations model that includes entrepreneurial innovation and the occupational choice of becoming an entrepreneur or a worker. For the role of entrepreneurs, even a policy intended to encourage innovation can negatively affect economic growth. For the effect of such policies, I focus on the role of R&D subsidies. I show that while R&D subsidies promote entrepreneurs’ R&D activities, they increase workers’ wages by boosting labor demand. Thus, it is more attractive to be a worker, which reduces the number of entrepreneurs. Subsidies can have both a negative and positive effect on growth, which results in an inverted U-shaped relationship between R&D subsidies and growth. In addition, a growth-maximizing R&D subsidy rate exists, although this rate is too high to maximize the welfare level of any one generation. When individuals are heterogeneous in their abilities, R&D subsidies reduce intra-generational inequalities.     

Self-fulfilling prophecies in the quality ladders economy

If R&D difficulty increases as it accumulates, as recent evidence suggests, then there is a value in the diversification of the aggregate R&D efforts over the whole range of industries in the economy. However, this paper proves that the quality ladders models allow for self-fulfilling prophecies to divert R&D from an arbitrary number of sectors, with potentially dramatic effects on the dynamics of industry structure and on the long-run aggregate growth performance. Moreover, in developing countries, perfect markets might allow stagnant monopolies to resist despite the removal of fundamental entry barriers to dynamic competition. This kind of coordination failure implies potentially strong effects of socio-cultural factors on growth and suggests a positive role for public R&D policy even in a framework of semi-exogenous growth.     

On the Growth and Welfare Effects of Defense R&D

In the United States, defense R&D share of GDP has decreased significantly since 1960. To analyze the implications on growth and welfare, we develop an R&D‐based growth model that features the commonly discussed crowding‐out and spillover effects of defense R&D on civilian R&D. The model also captures the effects of defense technology on (a) national security resembling consumption‐type public goods and (b) aggregate productivity via the spin‐off effect resembling productive public goods. In this framework, economic growth is driven by market‐based civilian R&D as in standard R&D‐based growth models and government‐financed public goods (i.e., defense R&D) as in Barro (1990). We find that defense R&D has an inverted‐U effect on growth, and the growth‐maximizing level of defense R&D is increasing in the spillover and spin‐off effects. As for the welfare‐maximizing level of defense R&D, it is increasing in the security‐enhancing effect of defense technology, and there exists a critical degree of this security‐enhancing effect below (above) which the welfare‐maximizing level is below (above) the growth‐maximizing level.     

The influences of different R&D types on productivity growth in OECD countries

Productivity has become an important concern for the sustainable development and growth of a country. Countries, such as those in the Organization for Economic Cooperation Development (OECD), that actively innovate and conduct Research and Development (R&D) activities always have high productivity growth, with research to date examining the positive influences of R&D on productivity. R&D activities are classified into three types: basic research, applied research and experimental development. To test the different influences of the different R&D types, panel data from 23 OECD countries for the period 1996–2010 have been constructed and the Data Envelopment Analysis method is used to measure and decompose productivity growth. Moreover, based on Mansfield's [“Basic Research and Productivity Increase in Manufacturing.” The American Economic Review 70: 863–873] model, the influences of each R&D type on productivity growth are tested. The empirical tests show that R&D investments in experimental development and applied research have a positive effect on productivity growth in the immediate period; basic research influences productivity growth with a lengthier lag, even up to three periods.     

International technology diffusion and economic growth: Explaining the spillover benefits to developing countries

Technology spillovers offer great opportunities for economic growth to developing countries that do little, if any, R&D activity. This paper explores the extent to which these countries benefit from foreign technology, the diffusion mechanisms involved, and the factors that shape their absorption capabilities. Results based on a non-stationary panel of 55 developing countries indicate that the benefits are quite substantial: a ten-percent increase in foreign R&D stock is translated into more than a two-percent increase in aggregate productivity. Of the diffusion channels considered, imports appear to be more conducive to R&D spillover. In addition, developing countries that enjoy larger benefits tend to exhibit larger stock of human capital, more openness to trade and foreign activities, and stronger institutions. These North–South R&D spillovers, although larger than previously suggested, appear less strong than North–North spillovers, adding to the general literature on economic divergence between developed and developing countries.     

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.     

Effect of piracy on innovation in the presence of network externalities

This paper analyzes the impact of simultaneous increases in piracy (piracy effect) and network externalities (network effect) on R&D investment. A single firm's R&D investment increases (or decreases) if the network effect (or piracy effect) is dominant. With R&D competition, if the firms “significantly” differ with respect to their R&D efficiencies and if the piracy effect dominates the network effect then the less efficient firm's R&D investment increases and that of the more efficient firm's decreases. In this case, the overall probability of successful innovation increases. The reverse holds if the network effect dominates the piracy effect. If the firms are “less” asymmetric then their R&D investment either increases or decreases depending on the relative strengths of the piracy and network effects.     

Does Environmental Policy Necessarily Discourage Growth?

This paper analyzes the long-run impact of an environmental policy on economic growth. A growth model with vertical innovation is modified by including intermediate goods as a source of pollution. Taxation on pollution reduces profits of intermediate firms as well as final outputs. However, it increases their mark-ups and alleviates profit losses. In this setting, profit losses are offset by the general equilibrium effect; thus, the tax enhances R&Ds which drive economic growth while it reduces pollution. If the government provides an R&D subsidy, the growth rate will be accelerated.