Innovation and Growth: Considerations for Public Policy

Abstract

This paper uses panel regression techniques to assess the policy determinants of private sector innovative activity -proxied by R&D expenditure and the number of new patents -across 19 OECD countries. The relationship between innovation indicators and multifactor productivity (MFP) growth is also examined with a particular focus on the role of public policies in influencing the returns to new knowledge. The results establish an empirical link between R&D and patenting, as well as between these measures of innovation intensity and MFP growth. Innovation specific policies such as R&D tax incentives, direct government support and patent rights are found to be successful in encouraging the innovative activities associated with higher productivity growth. However, direct empirical evidence of the positive effects of these policies on productivity is less forthcoming. A pervasive theme from the analysis is the importance of coupling policies aimed at encouraging innovation or technological adoption with well designed framework policies that allow knowledge spillovers to proliferate. In particular, the settings of framework policies relating to product market regulation, openness to trade and debtor protection in bankruptcy provisions are found to be important for the diffusion of new technologies.

R&D Policy and Schumpeterian Growth: Theory and Evidence

“…By contrast, the results in Table 2 show that R&D subsidies do not significantly affect output growth. This result supports the view that this type of policy instruments may not be particularly effective in stimulating research engagement or raising output levels (see Mamuneas andNadiri, 1996 andWestmore, 2013, respectively): federal funds crowd out privately funded research expenses, leaving the overall amount of R&D engagement unchanged; therefore, their net effect on economic growth is irrelevant (non-additionality; see also .…”

“…Our empirical setting allows us to identify the overall impact of R&D policy on economic growth, irrespective of whether this effect is driven by a higher R&D effort and patent performance, by innovation activities complementary or independent on formal research, and by a demand expansion associated with the larger fraction of income paid to research inputs. From this point of view, our analysis extends the recent work by Westmore (2013). The author examines first-and higher-order effects of innovation policies in OECD countries by considering separately the relationship between various R&D policy instruments and R&D effort, and between these and per-capita patents and total factor productivity growth.…”

“…Our empirical model admits a direct effect of R&D policy on the rate of economic growth in both the short and the long run; in this way, we avoid the need to impose parameter restrictions that may cause a mis-specification bias and, as a result, inconsistent estimates. Our formulation is consistent with that of Westmore (2013). Overall, the system specification that we use extends the empirical model developed by Venturini (2012a) for assessing the role of innovation policy in economic growth.…”

Policy Challenges for the Next 50 Years

“…Thus, countries with high business R&D spending (such as Japan, Switzerland and Sweden) may expect to benefit more from a positive technological shock than countries such as Hungary and the Slovak Republic (See second figure below). As already mentioned, a number of structural policies may be important in encouraging KBC investment, including business R&D. However, innovation-specific policies, such as R&D tax incentives and government direct support, are also associated with higher business R&D spending (Westmore, 2013).…”

Dynamics of Firm Participation in R&D Tax Credit and Subsidy Programs

“…We unfortunately cannot perform this same analysis for service sector firms. 23 See for instance Westmore (2013) and Wang (2013). 24 The percent of employees with a higher education degree shows practically no within variation.…”