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R&D, the National Innovation System, and Growth
William F. Maloney
Office of the Chief Economist, LAC
Joint work with M. Bosch and D. Lederman
See 2003 flagship: Closing the Gap in Education and Technology
5 Questions
1. How strong is LAC’s innovation effort in comparative terms?
Lederman and Saenz data set (2003)
2. Is this optimal given potential impact on growth?
3. What determines levels of R&D investment?
4. How efficiently does LAC use this invesment?
5. Why are we not Finland?
R&D Superstars
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
4 5 6 7 8 9 10 11
Log G DP pe r Capita
Pre
dic
ted
& O
bse
rved
R&
D/G
DP
IndiaArgentina
China
IsraelFinland
Korea
M exico
2
21
&
CAP
GDP
CAP
GDP
GDP
DR
Residuals from Benchmarking Regression: Asia
-2-1
01
2Pe
rcen
t Dev
iatio
n fr
om th
e M
edia
n
1970 1980 1990 2000Year
China India Indonesia
Korea Taiwan Thailand
Latin America-2
-10
12
Perc
ent D
evia
tion
from
the
Med
ian
1970 1980 1990 2000Year
Argentina Brazil Chile
Costa Rica Mexico Venezuela
Do NR offer fewer opportunities for innovation?
Advanced Countries: X- NR -2
-10
12
Perc
ent D
evia
tion
from
the
Med
ian
1970 1980 1990 2000Year
Australia Canada Finland
Ireland Netherlands Sweden
Finland: Rise in R&D Generalized
Finland: Rise in R&D/VA
0123456789
Perc
ent V
alue
Add
ed
1976
1990
23%
Do Returns to R&D Justify Efforts of Superstars?
US firm level/industry data- social returns Grilliches and Lichtenberg 1984 71% Terleckyj 1980, Scherer 1982 >100%
X country -Coe and Helpman 1995 G7 123%
Lederman and Maloney: extend to LDCs Five year period averages, 1960-2000 43-53 countries GMM system estimator (Blundell and Bond 1998,
Arellano and Bover 1995)
Estimating Rate of Return to I, R&D
• Derived from production function
• Ratio of rs/rk = R&D*/R&D
• US: 28%/7% = rise by 4 X. ( Jones and Williams 1998)
• Interact with GDP/capita
LY
DRr
Y
IrY sk ln)1()
&()(ln
Rate of return to R&D
Dependent Variable: Growth of GDP (Constant PPP), five year averages 1975-2000. Methodology: GMM System Estimator (1) (2) (3) (4) (5) (6) Initial level of gdp per capita 0.035 *** 0.001 -0.009 ** 0.000 0.001 0.088 *** Investment/GDP 1.299 *** 0.189 *** 0.328 *** 0.237 *** 0.271 *** 0.883 *** Labor growth 0.509 *** 0.600 *** 0.495 *** 0.754 *** 0.484 *** 0.771 *** R&D/GDP 3.193 *** 1.382 *** 0.518 *** 1.022 *** 9.622 *** 9.290 *** Tertiary Enrollment ratio 0.056 *** 0.028 * 0.053 ** 0.023 ** NR-Leamer 0.001 ** -0.006 *** -0.006 *** R&D*(gdp per capita) -0.300 *** -1.029 *** -0.992 *** R&D*(NR-Leamer) 0.371 *** 0.328 *** Investment/GDP*(GFP per capita) -0.131 *** -0.079 *** Countries 53 43 43 43 43 43
Observations 162 107 107 107 107 107
ROR R&D ~78%
Predicted Rates of Return
0%
20%
40%
60%
80%
100%
120%
2000 7000 12000 17000 22000
Constant 1995 PPP US$
Rat
e o
f R
etu
rn
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Op
tim
al R
&D
/Inve
stm
ten
t
Returns to R&D Returns to Investment R&D/Inv
MEXARGCHL
USAKOR FINJAMNICBRACRI
LAC should invest 2.5 to 10 times more in R&D !!
Dependent Variable: R&D/GDPEstimation Method: GMM System Estimator
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
R&D/GDP at t-1 0.90 *** 0.86 *** 0.89 *** 0.87 *** 0.90 *** 0.80 *** 0.87 *** 0.96 *** 0.68 *** 0.69 ***Log (GDPpc) 0.22 *** 0.21 *** 0.22 *** 0.21 *** 0.15 *** 0.00 0.07 * 0.18 *** -0.02 0.02GDP growth -1.22 -0.15 -0.03 0.00 1.12 *** -0.53 -0 0.09 2.68 ** 1.11Real Interest Rate -0.45 -0.23 * -0.40 *** -0.07 -0.86 *** -0.04 -0.11 0.52 * -0.15 -0.49 *Private Credit/GDP 0.07 *** 0.17Sd Growth -0.44 ***
Log (IP Index) 0.16 *** 0.39 ***Gov.Cons./GDP 0.99 *** 1.11 ** 1.15 *Quality of Res. Inst. 1.22 *** 1.12 ** 0.98 ***Collaboration 0.53 ***
Leamer Index -1.38 ***
Sargan Test (p-value) 0.36 0.45 0.52 0.47 0.58 0.42 0.26 0.50 0.96 0.96
2nd
Order Serial 0.32 0.35 0.35 0.33 0.33 0.40 0.35 0.47 0.42 0.37Observations 73 73 73 73 73 73 73 73 73 73Countries 30 30 30 30 30 30 30 30 30 30
Why do Rich Countries Invest More in R&D?
LAC’s efficiency of converting R & D into patents,TFP is also low
Patents = B1R&D + Bp country*R&D
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
AR
G
BR
A
CH
L
CO
L
CR
I
ME
X
PE
R
UR
Y
VE
N
TW
N
KO
R
ISR
FIN
NO
R
Human Capital
UniversityThink Tanks/ Antenna
Firms
Innovation & TFP Growth
Other Public Policies:
Rules of the Game Infrastructure (ICT) Subsidies/Tax incentives Coordination Initiatives
Global Knowledge Economy
National Innovation System
Innovation Clusters
Global Knowledge Economy
Most R & D $ and scientists in universities
but collaboration with private sector is low (interviews with entrepreneurs: score 1-7)
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Arg Bra Chi Col CR Mex Chn Esp Cor Ind Irl Aus Sw e Isr Fin EUA
Quality of Scientific Inst. Univ/Private Sector Collaboration
Finland: 40% have formal arrangements with U; Chile: 25% and not very fruitfulPublic think tanks poor and captured
60% R&D funds dedicated to basic science; US 15%
Why are we not Finland?
Not addressing serious mkt failures in innovation Few incentives to R & D - tax breaks, subsidies Weak efforts to help firms learn
Incubators, research parks, consortia
Disfunctional NIS: Explains more dynamic NR sectors in Scandinavia.
see From Natural Resources to the Knowledge Economy (2001)
LAC’s NIS-closer to the Holy Roman Empire than Finland. No mkt forces assure elements of NIS work together
FIN