Growth and Innovation Policy in a Small, Open Economy: Should You Stimulate Domestic R&D or Exports?

Abstract

In small and open economies, absorption of foreign knowledge through international trade often plays a more important role for domestic innovation and growth than investment in domestic R&D. This suggests that trade policies can increase knowledge spillovers from abroad. Public support to R&D can be motivated both by positive internal knowledge externalities and by its ability to expand absorptive capacity. This dynamic, empirical, general equilibrium analysis models these interplays between R&D, trade and productivity. It compares public R&D support and export promotion of R&D based products with respect to long term growth and welfare impacts. We find that export promotion is inferior to R&D support in spurring R&D. However, it is not outperformed in terms of welfare generation. The reason is that existing and politically persistent policy interventions create inefficiencies that can be counteracted by R&D-based export promotion as a second-best policy.KEYWORDS: absorptive capacity, computable general equilibrium (CGE) model, endogenous growth, research and development, international spillovers * We acknowledge funding from the Norwegian Research Council programme RENERGI and would also like to thank two anonymous referees for helpful suggestions.

Testing a model of UK growth: A role for R&D subsidies

“…This is one practical reason to exclude nominal frictions. 13 Moreover, R&D works on the supply side of the economy and in the medium and long run these e¤ects should not be much if at all dependent on nominal rigidities (see e.g. the e¤ects of R&D policy in Varga and t'Veld, 2011, Figure 1, p.658-59).…”

Efeitos macroeconômicos e setoriais das subvenções da FINEP no Brasil

“…Além dos efeitos sobre o crescimento econômico, a literatura mostra que, assim como os resultados advindos da P&D doméstica, a absorção do conhecimento de outras fontes é decisiva para a produtividade e competitividade da economia GRÜNFELD, 2011;ZÜRN et al, 2007;GHOSH, 2007). Também são encontradas evidências empíricas para os ganhos de produtividade ao estimular a geração de P&D, como em Bye, Faehn e Grünfeld (2011), cujo modelo busca analisar as inter-relações entre P&D, comércio e produtividade.…”

The role of human capital in structural change and growth in an open economy: Innovative and absorptive capacity effects

“…We exclude FDI as a channel for the Norwegian economy, in light of two Scandinavian studies (Braconier et al, 2001;Grünfeld, 2002) that find no significant spillover effects attributable to inward FDI. See also Bye et al (2011) for a discussion of channels for absorption.…”