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