Academic Research on SR&ED – Abstracts

Are International R&D Spillovers Costly for the United States?

Luintel, K.B. and Khan, M.

Coe and Helpman, among others, report positive and equivalent R&D spillovers across groups of countries. However, the nature of their econometric tests does not address the heterogeneity of knowledge diffusion across countries. We empirically examine these issues in a sample of 10 OECD countries by extending both the time span and the coverage of R&D activities in the data set. We find that the elasticity of total factor productivity with respect to domestic and foreign R&D stocks is extremely heterogeneous across countries and that data cannot be pooled. Thus, panel estimates conceal important cross-country differences. The United States appears to be a net loser in international R&D spillovers. Our interpretation is that when competitors catch up techno-logically, they challenge U.S. market shares and investments worldwide. This has implications for U.S. productivity.

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Returns to American Agricultural Research: Results from a Co-integration Model

Makki, S.S., Thraen, C.S. and Tweeten, L.G.

This study examines the returns to U.S. agricultural research investments for the years 1930 through 1990 using a co-integration model. Time series data on agricultural productivity, public and private research investments, farmers’ education, terms of trade, and commodity programs were found to be non-stationary and co-integrated. The estimated internal rates of return are 27 percent for public research and 6 percent for private research. These estimates from the most comprehensive and timely data assembled to date indicate that returns to public agricultural research compare favourably to real returns on alternative long-run investments, but do not call for large increases in investments suggested by previous studies or for the drop in public research expenditures appropriated by the U.S. Congress in recent years.

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How Effective are Canada’s Direct Tax Incentives for R and D?

Mansfield, E. and Switzer, L.

This study seems to be one of the first attempts to estimate the effects of Canada’s R and D tax credits and allowances on company-funded research and development. The results (based on a carefully selected survey of firms carrying out R and D in Canada, an econometric study of Canadian industrial R and D data, and other calculations involving the price elasticity of demand for R and D) indicate that these effects have been modest. The special research allowance seems to have increased R and D expenditures by about 1 percent, and the investment tax credit seems to have increased them by about 2 percent. These increases amounted to about 30 or 40 percent of the revenue losses to the government.

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The effects of R&D tax credits and allowances in Canada

Mansfield, E. and Switzer, L.

In Canada, as in many other countries that have adopted R&D tax credits and allowances, there has been considerable controversy over their effectiveness in increasing company-financed research and development. This study seems to be one of the first systematic attempts to estimate the effects of Canada’s R&D tax credits and allowances. The results present a very consistent picture. The survey results, the econometric results, and some simple calculations based on rough measures of the price elasticity of demand for R&D all suggest that the special research allowance increased R&D expenditures by about 1 percent and that the investment tax credit increased them by about 2 percent. These increases seem to be appreciably less than the revenue losses to the government.

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Estimating the impact of the R&D tax credit on strategic groups in the pharmaceutical industry

McCutchen, W.W.

The Economic Recovery and Tax Act of 1981 provided a 25 percent tax credit for increases in research and experimentation expenditures. Previous studies have shown considerable controversy about the effectiveness of various tax credits. This study focuses on the response of the strategic groups in the pharmaceutical industry to the credit. Four strategic groups were formed using different levels of research intensity (research/sales) and relative cash flow margin (cash flow/sales). The change in research intensity following enactment of the tax credit was estimated. The analysis found that the tax credit caused an increase in R&D expenditures. In addition, the R&D tax credit appears to have contributed to increased competitive R&D spending among the firms in the pharmaceutical industry.

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Tax Subsidies for R&D in Canadian Provinces

McKenzie, K.J.

This paper documents the variation in effective tax rates for R&D in Canada’s ten provinces. It is shown that while a sizable tax subsidy for R&D exists in every province, the variation across provinces is significant, ranging from an effective subsidy rate of about 40 percent in Alberta to over 200 percent in Quebec.

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Assessing the returns to collaborative research: Firm-level evidence from Italy

Medda, G., Piga, C. and Siegel, D.S.

We use firm-level data from Italian manufacturing firms to assess the relationship between various types of R&D and total factor productivity growth, including collaborative research with other firms and universities. A novel twist to our empirical analysis is that we estimate a sample selection model, which allows us to treat the decision to conduct R&D as endogenous. We find strong evidence of positive returns to collaborative research with other companies, whereas collaborative research with universities does not appear to enhance productivity. This result implies that firms may conduct R&D with universities when appropriability conditions are weak and the outcomes of such research projects do not yield direct strategic benefits.

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R&D, R&D spillovers and payments for technology: Canadian evidence

Mohnen, P. and L’épine, N.

This paper pursues two objectives. The first one is to examine the interplay between R&D and foreign technology payments as two sources of technological knowledge on Canadian data. The second is to re-examine the issue of R&D spillovers in Canada by using patents as carriers of interindustry R&D externalities. The analysis is framed in a temporary equilibrium model, where the technology is represented by a translog variable cost function. The R&D stock of knowledge and the physical capital stock are considered as fixed inputs. Payments for technology are treated as a variable input, just as labour and intermediate inputs. The R&D spillover operates as a shift variable. The latter is constructed using a Canadian patent-based technology-flow matrix. The model is estimated on the panel data of 12 R&D-intensive Canadian manufacturing industries for the years 1975,1977, 1979, 1981, 1982 and 1983. The main findings of this paper are: (i) the complementarity of R&D and payments for technology; and (ii) the substantial inter-industry variability of R&D spillovers, an average excess of private over the social rate of return on R&D of 50%, and the detection of key R&D externalities emitting sectors.

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Assessing spillovers from universities to firms: evidence from French firm-level data

Monjon S., Waelbroeck P.

We assess the importance of information flows from universities to innovative firms and determine the relative contribution of formal collaboration and pure knowledge spillovers in this process. We find that spillovers provide the most benefit to firms that imitate existing technologies or those that are involved in incremental innovation. On the other hand, highly innovative firms appear to derive most benefit from collaborative research with foreign universities. Indeed, highly innovative firms are at the frontier of the academic knowledge in their industry. Therefore, they only marginally benefit from aggregate (or industry-wide) spillovers. They require new forms of academic knowledge that they acquire through formal cooperation with foreign universities.

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Measuring Total Factor Productivity, Technical Change and the Rate of Returns to Research and Development

Nguyen, S.V. and Kokkelenberg, E.C.

This paper examines the relationship between research and development expenditures and total factor productivity using establishment level (or micro) data. The confidential data are taken from the U.S. Bureau of the Census Annual Survey of Manufacturers and other Census surveys. Several measures of total factor productivity are considered as are several variables that proxy for technical knowledge. The latter include research and development expenditures by the firm, the accumulated research expenditures of the industry, and new equipment purchases. We find that there is a statistically significant relationship among above measures of technical expertise and a broad measure of total factor productivity.

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Research Activity, Output Growth, and Productivity Increase in Japanese Manufacturing Industries

Odagiri, H.

The contribution of R&D expenditures to the productivity increase in Japanese manufacturing industries is investigated. With a popular single-equation approach, this contribution was found to be not only significant in all of the three periods, (1960-1966, 1966-1973 and 1973-1977), but also to exceed that estimated for the United States. However, when a simultaneous-equations approach was used to allow for an interaction between the learning effect (output growth-enhancing productivity increase through the accumulation of experience) and the price effect (productivity increase stimulating output growth through a declining price), the results suggested not only the importance of these two effects but also the over-evaluation of the contribution of R&D in the usual ordinary least-squares estimation.

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Private and quasi-social rates of return on pharmaceutical R&D in Japan

Odagiri, H. and Murakami, N.

This paper calculates the rates of return (ROR) on R&D in the pharmaceutical industry in Japan by estimating the R&D function and the return function, where the former refers to the link between R&D expenditures and new drug development and the latter to the link between new drug development and profits. Since the ROR estimated with industry data must include the effect of technological spillover to other firms and the contribution to industrial profits through generic production, it is interpreted as quasi-social ROR (quasi because consumers’ surplus is not taken into account), while the ROR estimated with company data does not include these effects and are interpreted as the private ROR. Our finding clearly indicates that the quasi-social ROR (about 33 percent) exceeds the private ROR (about 19 percent) suggesting the presence of both spillover and generic effects.

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Is Private R&D Spending Sensitive to its Price? Empirical Evidence on Panel Data for Italy

Parisi, M.L. and Sembellini, A.

In this paper, empirical evidence is presented on the elasticity of private R&D spending on its price. A censored panel-data regression model with random effects is applied to a balanced panel of 726 Italian firms over the 1992‚ 1997 period. Implied estimates point out that Italian firms’ response to policy measures (including tax credits), aimed at reducing the user cost of R&D capital, is likely to be substantial (1.50‚ 1.77). Furthermore, we also find that the elasticity of R&D spending is higher in recession (2.01) than in expansion (0.87).

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International and Intersectoral R&D Spillovers in the OECD and East Asian Economies

Park, J.

This study empirically explores international and intersectoral R&D spillover effects on the total factor productivity growth of manufacturing and nonmanufacturing sectors based on a pooled time-series data set of 14 OECD economies and 3 East Asian economies; Korea, Singapore, and Taiwan. The study finds that foreign manufacturing R&D has strong influence on domestic productivity growths of both sectors and that domestic manufacturing R&D has a substantial intersectoral R&D spillover effect on domestic nonmanufacturing productivity growth. The social rates of return to manufacturing R&D are estimated to be two to six times greater than the private rates of return.

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International R&D Spillovers and OECD Economic Growth

Park, W.G.

This paper quantifies the cross-national spillover effects of government and private investment in research and development (ROD), using a panel data set of ten OECD countries. The results show that domestic private research is a significant determinant of both domestic and foreign productivity growth, and that foreign government research stimulates domestic private research. These findings are significant in that they provide empirical support for arguments in favour of international economic policy coordination, particularly in the area of international science and technology.

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Defence Innovation Stock and Total Factor Productivity

Poole, E. and Bernard, J.T.

This study explores the impact of defence industrial production on the productivity of four Canadian three-digit SIC industries. A Tornqvist index of the annual change of total factor productivity is calculated. A defence production `innovation stock’ is constructed from new data on defence industrial production in Canada between 1961 and 1985. SURE multiple regression analysis shows that military production has a negative impact on total factor productivity for the four industries.

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Evaluating the Impact of Public Support on Commercial Research and Development Projects: Are Verbal Reports of Additionality Reliable?

Rye, M.

Additionality is a recurring issue when evaluating the impact of public support for research and development (R&D). To what degree does public support spur additional R&D efforts and output? This article discusses the additionality concept and its measurement. Verbal reports from recipients of public support are a widely used method for measuring the additionality of ongoing R&D programmes. However, it is often argued that these reports cannot be trusted since the recipients might have an incentive to answer strategically to maintain funding. Based on the verbal reports of project additionality in Norwegian evaluations over the last two decades, involving 2624 observations, higher additionality is reported in projects further from the market involving higher risks and uncertainty than in projects closer to market launch. This is in line with a priori expectations. It will be argued that the problem of strategic answering might be over-rated, and that verbal reports can provide important evidence. This is exemplified by results from verbal reports of additionality obtained by interviewing the customers of 21 different Norwegian research institutes.1 They show that public support is more important for the realization of projects within small- and medium-sized enterprises than with larger firms.

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The Impact of Procurement-Driven Technological Change on U.S. Manufacturing Productivity Growth

Saal, D.S.

As we enter the 21st Century, technologies originally developed for defense purposes such as computers and satellite communications appear to have become a driving force behind economic growth in the United States. Paradoxically, almost all previous econometric models suggest that the largely defense-oriented federal industrial R&D funding that helped create these technologies had no discernible effect on U.S. industrial productivity growth. This paper addresses this paradox by stressing that defense procurement as well as federal R&D expenditures were targeted to a few narrowly defined manufacturing sub-sectors that produced high tech weaponry. Analysis employing data from the NBER Manufacturing Productivity Database and the BEA’s Input-Output tables then demonstrates that defense procurement policies did have significant effects on the productivity performance of disaggregated manufacturing industries because of a process of procurement-driven technological change.

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Impact of R&D and Technology Diffusion on Productivity Growth: Empirical Evidence for 10 OECD Countries

Sakurai, N., Papaconstantinou, G. and Ioannidis, E.

This paper examines the empirical evidence on the impact of performed R&D and of R&D embodied in intermediate and capital goods on productivity performance in 10 major OECD countries over the last two decades. To quantify intersectoral and international technology flows, industry-level embodied R&D variables were constructed from an input-output (IO) R&D embodiment model. The productivity variables used are discrete Divisia growth indexes of total factor productivity (TFP), which were estimated from an IO growth accounting model. The results from pooled regressions indicate that the rates of return of the R&D variables were positively significant and increasing in the 1980s. In particular, embodied R&D is an important source for TFP growth in services, indicating very high social returns of the flows of capital-embodied technology into this sector. Moreover, the information and communication technology (ICT) cluster of industries played a major role in the generation and acquisition of new technologies at the international level.

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The economic benefits of publicly funded basic research: a critical review

Salter, A.J. and Martin, B.R.

This article critically reviews the literature on the economic benefits of publicly funded basic research. In that literature, three main methodological approaches have been adopted; econometric studies, surveys and case studies. Econometric studies are subject to certain methodological limitations but they suggest that the economic benefits are very substantial. These studies have also highlighted the importance of spillovers and the existence of localisation effects in research. From the literature based on surveys and on case studies, it is clear that the benefits from public investment in basic research can take a variety of forms. We classify these into six main categories, reviewing the evidence on the nature and extent of each type. The relative importance of these different forms of benefit apparently varies with the scientific field, technology and industrial sector. Consequently, no simple model of the economic benefits of basic research is possible. We reconsider the rationale for government funding of basic research, arguing that the traditional “market failure” justification needs to be extended to take account of these different forms of benefit from basic research. The article concludes by identifying some of the policy implications that follow from this review.

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The Welfare Analysis of Product Innovations, with an Application to Computed Tomography Scanners

Trajtenberg, M.

The main goal of this paper is to put forward a methodology for the measurement of product innovations using a value metric, that is, equating the “magnitude” of innovations with the welfare gains they generate. This research design is applied to the case of computed tomography scanners, a revolutionary innovation in medical technology. The econometric procedure centres on the estimation of a discrete choice model (the nested multinominal logit), which yields the parameters of a utility function defined over the changing quality dimensions of the innovative product. The estimated flow of social gains from innovation is used to compute a social rate of return to R&D, to explore the interrelation between innovation and diffusion, and to trace the time profile of benefits and costs, the latter suggesting the possible occurrence of “technological cycles.”

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The Welfare Analysis of Product Innovations, with an Application to Computed Tomography Scanners

Trajtenberg, M.

University science parks are alleged to stimulate technological spillovers. However, there is virtually no empirical evidence on the impact of these facilities on research productivity. We begin to fill this gap by examining whether companies located on university science parks in the United Kingdom have higher research productivity than observationally equivalent firms not located on a university science park. The preliminary results appear to be consistent with this hypothesis and are robust to the use of alternative econometric procedures to assess relative productivity.

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R&D, Public Innovation Policy, And Productivity: The Case Of Danish Manufacturing

Sorensen A., Kongsted H.C., Marcusson, M.

The purpose of this paper is to investigate the relationship between private R&D, public innovation support transferred to the private sector, and productivity in Danish manufacturing. Two main conclusions are established. First, public innovation support has a positive and significant effect on private R&D expenditures with an estimated elasticity of 0.062. Second, the indirect effect on productivity from public innovation support is reflected in a positive point estimate which is found to be robust to different specifications of R&D capital.

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How Relevant is University-Based Scientific Research to Private High Technology Firms? A U.S.-Japan Comparison

Spencer J.W.

This cross-national study explores the relative contributions of academic and corporate research to subsequent industrial R&D activities within one industry. Japanese university research emerged as less influential than Japanese corporate research. The difference between the relevance of U.S. university and U.S. corporate research was only marginally significant. In both countries, university research appeared to contribute most to domestic firms. These findings accentuate the role that national institutional structures play in influencing a country’s university research activity.

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R&D spillovers and technology transfer among and within vertical keiretsu groups: Evidence from the Japanese electrical machinery industry

Suzuki K.

Using a dynamic factor demand model with R&D externalities, we analyze the effects of technological diffusion among and within vertical keiretsu groups in the Japanese electrical machinery industry. We find that technology transfer from a core firm to its subcontracting firms is substantial. We also find positive R&D spillovers, which stem from the R&D activities of other keiretsu groups. Particularly remarkable are the spillovers between core firms of competing keiretsu groups.

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Some tests of the incentive effects of the research and experimentation tax credit

Swenson C.W.

The effectiveness of the tax credit for research and experimentation (R&E) expenditures is examined using a panel of firm data for the period 1975 through 1988. Using a structural model, the results generally indicate that the credit resulted in increased R&E spending. However, the effect of the credit was substantially mitigated by the impacts of net operating loss carryovers and low growth opportunities. Results also indicate some degree of decreased R&E spending as a result of debt restructuring activity. Tax policy implications are discussed.

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Knowledge Spillovers and High-technology Clustering: Evidence from Taiwan’s Hsinchu Science-Based Industrial Park

Tsai D.H.

Knowledge spillovers of high-technology industries are alleged to be important determinants of industrial clustering. Dynamic production modelling is applied to measure the sectoral and spatial spillover effects to study the implications of various types of knowledge spillovers on high-technology industry clustering in Taiwan’s Hsinchu Science-based Industrial Park (HSIP). The analysis is performed using the Taiwanese government’s industrial census of technological activities at the micro-level with 2340 plants for the period 1986-1995. We find substantive sectoral and spatial knowledge spillover effects, which are considered to be major motivating forces for regional concentration patterns of Taiwan’s high-technology industries.

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International R&D Spillovers: A Comment

Van Pottelsberghe B., Lichtenberg, F.R.

Previous studies have found that importing goods from R&D-intensive countries raises a country’s productivity. In this paper, we investigate econometrically whether foreign direct investment (FDI) also transfers technology across borders. The data indicates that FDI transfers technology, but only in one direction: a country’s productivity is increased if it invests in R&D-intensive foreign countries‚ particularly in recent years‚ but not if foreign R&D-intensive countries invest in it. Other findings of the paper are that the ratio of foreign-R&D benefits conveyed by outward FDI to foreign R&D benefits conveyed by imports is higher for large countries than it is for small ones, that failure to account for international R&D spillovers leads to upwardly biased estimates of the output elasticity of the domestic R&D capital stock, and that there are much larger transfers of technology from the United States to Japan than there are from Japan to the United States.

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Spillover effects, linkage structure, and research and development

Wolff E.N., Ishaq Nadiri M

We use US input-output data for the 1947-1977 period to analyse the relations among research and development (R&D), technical change, and intersectoral linkages. Our most novel finding is that among manufacturing industries, an industry’s rate of technological progress is positively and significantly related to that of its supplying sectors. Another new finding is that among all sectors of the economy, a sector’s R&D intensity and rate of technological progress positively affect its degree of linkage with other sectors. We also find significant spillovers from R&D embodied in new investments.

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Capital Goods Trade and R&D Spillovers in the OECD

Xu B., Wang J.

In this paper, the significance of capital goods trade as conduit for R&D spillovers is investigated and the impact of international R&D spillovers on OECD countries is quantitatively assessed. Capital goods trade is tested against non-capital goods trade, and knowledge embodied in trade flows is evaluated vis-à-vis R&D spillovers in disembodied form. Our estimation indicates that about half of the return on R&D investment in a G7 country spilled over to other OECD countries. Trade in capital goods was found to be a significant channel of R&D spillovers, although the majority of the R&D spillovers in the OECD were transmitted through other channels.

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A computational analysis of R&D support programs.

Garza, D., Giat, Y., Hackman, S. T. and Peled, D.

This paper compares two common government R&D support programs, R&D tax credits and direct R&D grants. To study their effectiveness and the extent to which their design matters, we analyze these programs within a dynamic equilibrium model of imperfectly competitive industries. Adopting comprehensive welfare measures that take into account government, producer and consumer surpluses, we find that both schemes exhibit positive social returns. Mid-range R&D-intensive sectors exhibit higher social returns than either high or low R&D-intensive sectors. Both incentive schemes generate positive measures of R&D input additionality of magnitudes consistent with empirical R&D research. However, R&D grants that require firms to allocate subsidy funds to R&D spur less R&D than a more flexible R&D tax credit. Subsidy schemes can even induce competing firms to over-spend on R&D, generating negative producer surplus and possibly negative social returns.

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Economic efficiency of federal provision of scientific information and support for science research in Canada

Davies, J. B., and Slivinski, A.

We compare two common government R&D support programs, R&D tax credits and direct R&D grants. To study their effectiveness and the extent to which their design matters, we analyze these programs within a dynamic equilibrium model of imperfectly competitive industries. Adopting comprehensive welfare measures that take into account government, producer and consumer surpluses, we find that both schemes exhibit positive social returns. Mid-range R&D-intensive sectors exhibit higher social returns than either high or low R&D-intensive sectors. Both incentive schemes generate positive measures of R&D input additionality of magnitudes consistent with empirical R&D research. However, R&D grants that require firms to allocate subsidy funds to R&D spur less R&D than a more flexible R&D tax credit. Subsidy schemes can even induce competing firms to over-spend on R&D, generating negative producer surplus and possibly negative social returns.

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Benefit-cost analysis of R&D support programs

Lester, J.

Federal provision of scientific information and support for science research has declined significantly in recent years, and a trend away from pure research toward applied, and commercial research has begun. This commentary asks whether those and other trends in this area can be justified in terms of economic efficiency. It is argued that the marginal benefits of scientific information and research have likely risen relative to production costs and the marginal cost of public funds has fallen, implying that reduced provision cannot be justified on efficiency grounds. An efficiency rationale for increased support for research that could be commercialized is also lacking. Longer-term trends include the rise of open data, which does make sense, and a relative shift from intramural government research and development toward university-based R&D. The latter shift likely responds to underlying economic factors but does not warrant a sudden sharp reduction in government research, such as seen recently in Canada.

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R&D subsidies and the performance of high-tech start-ups

Colombo, M.G., Grilli, L., and Murtinu, S.

The benefit-cost approach used in this article calculates the impact of R&D subsidies on real income taking into consideration the benefit created by knowledge spillovers from the induced R&D, the cost of financing the subsidies with taxes that unavoidably harm economic performance, the cost of shifting resources from their market-determined uses, and administration and compliance costs. The SR&ED credit has two components: a regular 20 percent credit and an enhanced 35 percent refundable credit for smaller Canadian-controlled firms. The regular credit generates a net economic benefit, but the enhanced credit fails a benefit-cost test, owing to higher compliance costs and a higher subsidy rate. IRAP also fails a benefit-cost test, despite the assumption that IRAP-funded R&D generates higher spillovers than R&D funded by the tax credit, owing to the high cost of administering and complying with the program.

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Evaluating the impact of R&D tax credits on innovation: A microeconometric study on Canadian firms

Czarnitzki, D., Hanel, P., and Rosa, J. M.

This study examines the effect of R&D tax credits on innovation activities of Canadian manufacturing firms. Over the 1997–1999 period the Federal and Provincial R&D tax credit programs were used by more than one third of all manufacturing firms and by close to two thirds of firms in high-technology sectors. We investigate the average effect of R&D tax credits on a series of innovation indicators such as number of new products, sales with new products, originality of innovation, etc. using a non-parametric matching approach. Compared to a hypothetical situation in the absence of R&D tax credits, recipients of tax credits show significantly better scores on most but not all performance indicators. We, therefore, conclude that tax credits lead to additional innovation output.

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Effectiveness of R&D tax incentives in small and large enterprises in Quebec

Baghana, R., and Mohnen, P

In this paper we evaluate the effectiveness of R&D tax incentives in Quebec, using manufacturing firm data from 1997 to 2003 originating from R&D surveys, annual surveys of manufactures and administrative data. The estimated price elasticity of R&D is –0.10 in the short run and –0.14 in the long run, with slightly higher elasticities for small firms than for large firms. We show that there is a deadweight loss associated with level-based R&D tax incentives that is particularly acute for large firms. For small firms, it is not sizeable enough to suppress the R&D additionality, at least not for quite a number of years after the initial tax change. Incremental R&D tax credits do not suffer from this deadweight loss and are from that perspective preferable to level-based tax incentives.

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Canadian science, technology and innovation policy: The product of regional networking?

Salazar, M., and Holbrook, A

The structure of federal countries poses challenges to science, technology and innovation (STI) policy-making and regional development not found in centrally governed nations. This paper tests the thesis that Canadian STI policy is highly regionalized in practice because of its networked structure, despite most of the funding coming from the federal government, which formulates most STI policies and programmes. Many of Canada’s STI programmes promote the creation of networks. These networks are part of the federal emphasis given to provincial/regional economic development and more recently to industrial cluster promotion.

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Tax subsidies for R&D in Canadian Provinces

McKenzie, K. J.

This paper documents the variation in effective tax rates for R&D in Canada’s ten provinces. It is shown that while a sizable tax subsidy for R&D exists in every province, the variation across provinces is significant, ranging from an effective subsidy rate of about 40 percent in Alberta to over 200 percent in Quebec.

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Benchmarks, yardsticks and new places to look for industrial innovation and growth

Lipsett, M. S. and Lipsey, R.G.

This paper presents new figures and proposes new metrics for industrial innovation in Canada. Two sources of new information are cited: Canadian taxation statistics; and a demographics research database that is currently under development. Although the figures are local to Canada, the approach is likely to apply internationally.

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R&D Tax Incentive Comparisons: Canadian and US Large Manufacturing Industries

Iqbal, M.

The study analyzes the tax-related benefits of research and development (R&D) for the petrochemical, telecommunications, steel, and news print industries in selected Canadian and US jurisdictions using a cash flow model. The findings show that Canadian R&D performers generally receive greater tax benefits than their counterparts in the United States, although the overall corporate tax burden is marginally higher in Canada. Such benefits are especially pronounced for Quebec and Ontario owing to the provision of a wage tax credit in Quebec and a super allowance in Ontario.

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The Goals of R&D in the 1970s

Freeman, C., Oldham, C.H.G., Cooper, C.M., Sinclair, T.C. and Achilladelis, B.G.

This report was originally prepared for the Meeting of Ministers of Science at OECD in October I971. The main theme of the report concerns the broad changes in the distribution of R & D expenditures, which have occurred in the OECD area in the I96os and those, which may be expected or desired in the 1970s. The report starts, however, from the position that the scale and trend of R & D expenditures can only be sensibly discussed in relation to broader issues of policy, which mission-oriented programmes are designed to serve. Although OECD has kindly given permission for its publication in Science Studies, it appears here as a Discussion Paper, designed to stimulate reassessment of certain basic assumptions that have characterized research in science policy to date. OECD bears no responsibility for the views expressed, which are entirely those of the authors. They are deeply indebted to M. Fabian for invaluable advice and assistance on the R & D statistics.

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Technical Change, Returns to Scale, and the Productivity Slowdown

Nadiri, M.I.

The recent slowdown in the growth of productivity in the U.S. has attracted considerable attention. The deceleration has been attributed to many factors, including a slowdown in the growth of capital intensity and the stock of R&D, changes in the sectoral composition of output, dramatic rises in oil prices, and declines in the capital utilization rate due to sluggish demand. In this article, the authors provide a framework for decomposing changes in total factor productivity (TFP) in the presence of economies of scale. The traditional growth accounting framework is a special case of our model. By allowing for economies of scale, authors demonstrate formally the positive relationship between growth in productivity and output, which is found in the empirical studies by economists John Kendrick, Nicholas Kaldor, and others. The model is based on an output demand function, a variable cost function, which is shifted by disembodied technical change and a stock of R&D, and a market-clearing rule, which equates output price to average variable cost plus quasi-rents to R&D. This framework identifies the contribution of demand growth, real factor prices, and the stock of R&D to changes in the growth of TFP.

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Effect of Publicly and Privately Financed R&D on Total Factor Productivity Growth

Niininen, P.

The effects of privately and publicly financed R&D on total factor productivity growth are examined. Total factor productivity (TFP) is decomposed into mark-up, exogenous demand, factor price, and publicly and privately financed R&D effects at the industry level. The constructed dataset consists of 11 Finnish manufacturing industries in 1975–1993. The results suggest that both privately and publicly financed R&D has a considerable effect on the TFP rate of growth but R&D explains only part of the technical progress. On average, total R&D accounted for about 9 percent of the TFP rate of growth in manufacturing industries while one-fourth of the growth could be attributed to the residual technical change. Exogenous demand effect was the biggest component, accounting almost for one-third of the TFP rate of growth.

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Knowledge Flows and Productivity

Peri, G.

The effects of privately and publicly financed R&D on total factor productivity growth are examined. Total factor productivity (TFP) is decomposed into mark-up, exogenous demand, factor price, and publicly and privately financed R&D effects at the industry level. The constructed dataset consists of 11 Finnish manufacturing industries in 1975–1993. The results suggest that both privately and publicly financed R&D has a considerable effect on the TFP rate of growth but R&D explains only part of the technical progress. On average, total R&D accounted for about 9 percent of the TFP rate of growth in manufacturing industries while one-fourth of the growth could be attributed to the residual technical change. Exogenous demand effect was the biggest component, accounting almost for one-third of the TFP rate of growth.

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A Cost-Benefit Analysis of R&D Tax Incentives

Russo, B.

Although technical knowledge generates spillover benefits, production of technical knowledge creates congestion externalities; thus, private R&D investment could be inefficient. A computable general equilibrium model is used to rank tax incentives by their effects on research effort and measure welfare effects. Five results stand out: R&D tax credits produce relatively large increases in research effort and welfare. Lower corporate income tax rates and ITCs for downstream users of high-tech production inputs rank second. Revenue losses from lower personal income tax rates can produce welfare losses. Ironically, ITCs for upstream producers of innovative inputs are ineffective. Incremental R&D credits dominate comprehensive credits.

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Understanding Patents: The Role of R&D Funding Sources and the Patent Office

Sanyal, P.

This paper analyzes the effects of different sources of R&D funding and patent office attributes on the patenting process. Another important contribution is modelling the effect of a random delay in the ‘pendency’ time as a stochastic process and quantifying its effect on patenting. The empirical estimation is based on four major industries – electronics, chemical and biology, transportation and aeronautics – for the time period 1976-1998. The primary results are: First, the source of R&D funding as well as performer (academic, federal and industry) has a differential effect on patenting. Second, the effects of some types of R&D and spillovers are different post-1990. Third, in the short run patenting is heavily influenced by patent office attributes. The state-level analysis sheds light on the differing role of the federal government as an R&D performed and as a source of R&D funds for industry. The results contribute to a better understanding of the shortcomings in the formulation of science indicators.

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The Effects of Double-Counting and Expensing on the Measured Returns to R&D

Schankerman, M.

This article focuses on the effects of double-counting and expensing on the measured returns to R&D. The contribution of research and development (R&D) to economic growth has been measured in two general ways. The first is to compute total factor productivity in a growth accounting framework and to attribute this “residual” growth to R&D. The prevailing view is that, in the presence of double-counting, the measured contribution of R&D represents the return above and beyond the normal remuneration to traditional capital. The author demonstrates that this excess returns interpretation (ERI) is essentially correct in the growth accounting framework and that the resulting bias in the measured contribution of R&D to growth is large. In postwar U.S. manufacturing the measured residual is biased downward by as much as 30%. The expensing bias is downward and reinforces the excess returns bias in this case, and the total bias is large. In both the growth accounting and econometric contexts, the magnitude of the biases may vary across samples and over time. There is simply no substitute for properly measured variables.

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The Effects of Double-Counting and Expensing on the Measured Returns to R&D

Surendra, G., Gu, W., Lee, F. C.

The aim of this paper is twofold: to examine the relationship between IT investment and labour productivity growth; and to examine the importance for labour productivity growth of domestic and international R&D spillovers embodied in IT goods.

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Improving Canada’s SR&ED Tax Incentive Program

Warda, Jacek.

This is a Conference Board of Canada Members’ Briefing detailing some of the advantages and shortfalls of the SR&ED tax incentive program.

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Research and Development Productivity and Spillovers: Empirical Evidence at the Firm Level

Wieser, R.

A variety of methods have been used to investigate the empirical relationship between research and development (R&D) spending and the productivity of firms. The most widely employed frameworks are the production function and the associated productivity framework. In these settings, productivity growth is related to expenditures on R&D, and an attempt is made to estimate statistically the part of productivity growth that can be attributed to R&D activities. This article surveys the expansive body of empirical literature on this subject and finds a large and significant impact of R&D on firm performance on average. However, the estimated returns vary considerably between the different studies due to differences across data samples and econometric models, as well as methodological and conceptual issues. A meta-analysis on the studies surveyed reveals that the estimated rates of return do not significantly differ between countries, whereas the estimated elasticities do. Furthermore, the estimated elasticities are significantly higher in the 1980s and consistently higher in the 1990s compared with the 1970s. Hence, contrary to a widely held belief, we find no convincing evidence of an exhaustion of R&D opportunities in the last two decades.

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Cross-Country R&D and Growth: Variations on a Theme of Mankiw-Romer-Weil

Brat D.A., Park W.G.

This paper studies how international research and development (R&D) activities contribute to international differences in productivity. Domestic R&D is an important factor of production as are spillovers from foreign research. While cross-country differences in domestic research contribute to international differences in productivity, world research spillovers contribute to narrowing those differences. Furthermore, in the presence of international R&D spillovers, global increasing returns to research exist. This enhances the effect of world research on the growth rates of countries that receive spillovers.

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R&D Spillovers and the Geography of Innovation and Production

Audretsch D.B., Feldman M.P.

Previous research has indicated that investment in R&D by private firms and universities can lead to knowledge spillover, which can lead to exploitation from other third-party firms. If the ability of these third-party firms to acquire knowledge spillovers is influenced by their proximity to the knowledge source, then geographic clustering should be observable, especially in industries where access to knowledge spillovers is vital. The spatial distribution of innovation activity and the geographic concentration of production are examined, using three sources of economic knowledge: industry R&D, skilled labor, and the size of the pool of basic science for a specific industry. Results show that the propensity for innovative activity to cluster spatially is more attributable to the influence of knowledge spillovers and not merely the geographic concentration of production.

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Barriers to Innovation and Subsidy Effectiveness

Gonzalez X., Jaumandreu J., Pazo C.

We explore the effects of subsidies by means of a model of firms’ decisions about performing R&D when some government support can be expected. We estimate it with data on about 2,000 performing and nonperforming Spanish manufacturing firms. We compute the subsidies required to induce R&D spending, we detect the firms that would cease to perform R&D without subsidies, and assess the change in the privately financed effort. Results suggest that subsidies stimulate R&D and some firms would stop performing in their absence, but most actual subsidies go to firms that would have performed R&D otherwise. We find no crowding out of private funds.

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Public support to business R&D: A survey and some new quantitative evidence

Capron, H., Van Pottelsberghe, B.

The objective of this paper is to provide, with reference to the integrated assessment scheme suggested by Capron and van Pottelsberghe (1997a), some policy implications that might arise from a quantitative evaluation of the effectiveness of R&D subsidies in seven major industrialised countries. Ultimately, we would like to see whether econometric estimates would allow innovation policies to become, tomorrow, “a little bit less a matter of faith and a little bit more a matter of understanding”, thus challenging the famous statement of Rothwell and Zegveld (1988). Our empirical framework covers two categories of studies. First, we test whether R&D subsidies have a direct impact on productivity growth. Second, we evaluate the stimulation effect of these subsidies on private R&D investment. The evaluation procedure is implemented both at the aggregate manufacturing level and for 22 disaggregated manufacturing industries. The paper is structured as follows. The existing quantitative literature on the effectiveness of R&D subsidies is surveyed in the next section. The third section concentrates on the evaluation of the impact of R&D subsidies on productivity and on the private decision to invest in R&D. The conclusions and some suggestions related to the design of public investment policies are presented in the final section.

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Leveraging Research and Development: Assessing The Impact of the U.S. Advanced Technology Program

Feldman, M.P., Kelley, M.

This paper examines the factors that affect a firm’s chances of winning an award from the Advanced Technology Program (ATP) and the subsequent impact of the award on a firm’s success in raising additional funds for its research and development (R&D) activities. Analysis of data from a survey of 1998 ATP applicants shows that proposals with higher ratings by technical and business/economic experts have a greater chance of winning an award. Further, the projects and firms selected by ATP are more willing to share their research findings with other firms, and tend to be those that open up new pathways for innovation through combining technical areas or by forming new R&D partnerships. Most of the non-winners have not proceeded with any aspect of the R&D project proposed to ATP and, of those that have, most did so at a smaller scale. Furthermore, the ATP award has prestige value for the winning firms; the halo effect from the award increases the success of these firms in attracting additional funding from other sources. Our conclusion is that the ATP is leveraging activities that have a strong potential for broad-based economic benefit.

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Effects Directs et Indirects de la R&D sur la Productivite: Une Analyse de l’Industrie Manufacturiere Belge

Fecher, F.

The present study investigates the effects of research and development (R&D) on productivity growth in the Belgian manufacturing industry. The data concerns a sample of firms belonging to thirteen sectors and covers the period 1981-1983. The method is based on econometric estimations of Cobb-Douglas production functions, which include in addition to traditional inputs three technological factors: direct R&D, national and international indirect R&D. The links between productivity growth and R&D are rather weak: neither the direct R&D, nor the international indirect R&D has significant impacts on productivity growth. On the other hand, a statistically significant coeeficient is obtained for national indirect R&D. We also find that those three types of R&D are rather substitutes except in the low R&D intensive sectors where they are complements.

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European Research Joint Ventures and Innovation: A Microeconometric Analysis of RJV Impact on Firms’ Patenting Activity

Cusmano, L.

Evolutionary theories of technological change and industrial dynamics give primary importance to interaction between heterogeneous agents, endowed with complementary assets and competencies. Accordingly, support to co-operative R&D is given a central role in technology policy, as a mean for increasing system connectivity, triggering virtuous cycles of learning and promoting variety. However, despite the increasing attention to the rationales, benefits and costs of R&D agreements that, within the broader debate about technology policy, have been extensively investigated through appreciative theories, game theoretical models, and strategic management studies, there has been little corresponding empirical work on their efficacy. The empirical investigations have been conducted mostly at the level of case studies or one-time surveys of participants. The technology policy emphasis on extensive collaborative programmes, covering nearly every area of industrial research and involving very large numbers of organisations, has been barely matched by systematic investigations on large samples.

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Basic Research and Productivity Increase in Manufacturing: Additional Evidence

Link, A.N.

This paper conveys the findings of a sample of 51 major manufacturing firms, which were active in research and development (R&D) to support Edwin Mansfield’s paper, Basic Research and Productivity Increase in Manufacturing,³ which found that “firm rates of productivity change are related to the amount of company-financed basic research performed, certeris paribus.” ⁴ The paper shows statistics, which “confirm Manfield’s proposition that company-financed basic research is a significant determinant of firm productivity growth.” The paper also highlights findings that support that “the basic portion of government-sponsored R&D is an important part of the R&D investments of a firm.” ⁴

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Research and Development, Production Functions, and Rates of Return

Minasian, J.

This paper reports on the findings from a study for “‘rate of return’ to research and development [R&D] expenditures in a production function setting.” The author previously argued that R&D contributed to efficiency and that the amount of R&D conducted by a firm correlated positively to its growth in productivity. The paper shows the formulae for their findings, which concluded that “$0.54 worth of value added can be created per year indefinitely if the stock of [R&D] is increased by $1.00 and the new level [is] maintained permanently. This means that gross return on investment in research and development is 54 percent as compared with 9 percent for capital.” ⁶ This was determined using figures from R&D projects that failed and those that were successful. Minasian concludes that “increased productivity, caused by [R&D], is partially passed on to consumers via lower prices for goods, [and so the] estimate will tend to reflect social returns.” ⁶

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Industrial R&D in Japan and the United States: A Comparative Study

Mansfield, E.

This paper studies the relationship between the extent of industrial R&D in Japan and the U.S.A, and the rate of their productivity increases “with particular emphasis on the differences between these countries in the effects of applied R&D and basic research.” ⁸ Mansfield’s findings show that Japan’s rate of return [ROR] in R&D “was about 42 percent,” ⁸ however, Mansfield also highlights that a firm’s tendency to import technology could have an effect on its ROR, and so with this variable Japan’s ROR on R&D fell to 33 percent, which was still relatively high. The findings also suggest that, compared with firms in Japan, firms in the U.S.A. “obtained higher returns from basic research,” however firms in Japan “obtained higher returns from applied R&D than [firms in the U.S.A.].” ⁸ Mansfield suggests that this is due to “Japan’s industrial R&D [being] financed by the government (and has gone largely for non-commercial purposes),” and that in the U.S.A. university researchers play a larger role in R&D than in Japan, contributing to the U.S.A.’s results in basic research. The study also found that “Japanese firms base about one-third of their R&D projects on suggestions from their production personnel and customers, whereas only about one-sixth of American projects stem from these sources,” ⁸ and that in Japan less small to medium-sized businesses contribute to R&D. Mansfield concludes that Japan has utilized process-based R&D more effectively than the U.S.A. to improve existing products; however, the U.S. has focused on product-based R&D thus creating more new products.

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The R&D Tax Credit and Other Technology Policy Issues

Mansfield, E.

This paper presents the findings from analyses of R&D tax credits in Canada, the U.S.A. and Sweden. Mansfield finds that across the three countries, R&D credits and incentives only increased industrial R&D by one to two percent, or “one-third of the foregone government revenue.” ¹² Mansfield suggests that to increase R&D credits’ effectiveness, the definition should be refined and “the computation of the base amount should be changed.” ¹² Additionally, Mansfield concludes that patents were not running out of favour with firms; however, patents were only essential to the chemical and pharmaceutical industries.

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Explicit and Implicit Tax Effects of the R&D Tax Credit

Berger, P.

This paper reports the findings from its analysis of the 1981 R&D tax credit. Berger found that the tax credit “increased R&D intensity (measured as the ratio of R&D spending to sales) by at least
2.9%, on average, during 1981-89;” ¹⁴ however this increased to 8.5% between 1982 and 1985 when credit was at its highest. This finding concluded “the credit induced $1.74 of additional spending per revenue dollar foregone during 1982-85,” ¹⁴ which was higher than had been previously reported.