Measuring Innovation Performance in Developing Countries

Reinhilde Veugelers

KULeuven, EC (BEPA) & CEPR

Optimal R&D intensity to maximize output?

From an extended Cobb-Douglas production function, the optimal R&D/GDP ratio depends onPurchase price of R&DR&D elasticity of outputRisk-free interest rateRate of R&D depreciation

Actual R&D to GDP ratio:

Wide variation in levels across countries, even in EU

Variation in growth rates across countries, even in EUNo clear sign of convergence, even in EU

??? Common target of 3% ???

Zooming in on the country differences in R&D/GDPVariation in R&D elasticity of output

The sectoral dimension: high-tech sectors (ICT..)with higher returns (higher opportunity,

measurement issues)

EU-US Gap in R&D Spending

EU-US Gap in Specialization

(VA)

EU-US Gap in Productivity

Growth Rates

1991-1995

1996-1999

1991-1995

1996-2000

1991-1995

1996-2000

Total High Technology Manufacturi

ng

0.67 0.62 0.825 0.826 0.48 0.41

 

(ICT) 0.55 0.41 0.45 0.42 0.23 0.27  

(Non-ICT) 0.78 0.81 0.98 1.01 1.15 2.81  

Source : ECFIN, Annual Review 2004

Comparison of EU-US difference in R&D spending and Productivity Growth (US=1)

Linking R&D intensity and Productivity Growth

Divergence bt countries in productivity growth can be related toHigher R&D intensity in most sectorsLarger weight of R&D intensive sectorsBetter growth performance in R&D sectors

Country divergence in R&D/innovation output

Beyond R&D: Innovation: Creation and diffusion(European Innovation Scoreboard Indicators)

1. Human resourcesS&E graduates, Population with tertiary education,

Participation in life-long learning, Employment in medium-high and high-tech manufacturing, Employment in high-tech services )

2. Knowledge creationPublic R&D expenditures (GERD - BERD) (% of GDP)

BERD) (% of GDP (by source of funding), EPO&USPTO high-tech patent applications; EPO&USPTO patent applications

3. Transmission and application of knowledgeSMEs innovating in-house, SMEs involved in innovation co-operation,

Innovation expenditures

4. Innovation finance, output and marketsShare of high-tech venture capital investment, Share of early stage venture

capital in GDP, SMEs sales of 'new to market' products, SMEs sales of 'new to the firm but not new to the market' products, Internet access/use, ICT expenditures, share of manufacturing value-added in high-tech sectors, volatility-rates of SMEs, TBP, High tech imports-exports

Differences in Country Dispersion between R&D and Innovation

Country heterogeneity in growth: catching up?

The policy perspective:The policy perspective:How to improve innovative capacity? How to improve innovative capacity?

creation and diffusioncreation and diffusion Beyond stimulating R&D investments

Improving Technology Transfer/Diffusion ( Eg ISL mechanisms, absorptive capacity of users, investment in complementary assets)

Networking Among Actors on a Global Scale: research, firms, finance, policy makers,…

Framework conditions, especially clear IPR regimes and standards; flexibility in product markets (easy of entry), labour markets (labour

mobility),venture capital markets

This requires a Systemic Policy Approach

To feed systemic policy approach: A call on theory, data, econometrics:The right variables at the right level?

What are the driving forces for innovative capacity? Do we have data on this Esp diffusion capacity variables

Which country ideosyncracies matter to explain differences in Levels of driving forces Effects of driving forces

Sectoral composition Time dimension (eg initial levels, catching up Firm composition Institutional setting… Policy environment

Systems approach: interactions