R&D in WorldScan Paul Veenendaal
Outline WorldScan characteristics How is R&D modelled? Spillover estimates and their implications Extension: R&D workers are difficult to attract Lisbon agenda targets what are the benefits of subsidizing R&D? R&D in WorldScan
WorldScan General equilibrium (micro foundations) Interaction: markets, countries and sectors (GTAP-8 classifications) Recursively dynamic model Econometrically underpinned consumer demand, savings, capital mobility, R&D spill-overs Many toggle-wise extensions (variations on a core version) climate change and clean air policies monopolistic competition foreign direct investments R&D sector and endogenous R&D decisions Human capital development 3 R&D in WorldScan
R&D modelling in WorldScan R&D expenditures accumulate in R&D stocks Firms decide on optimal R&D stock R&D stock accumulations are produced in a separate R&D sector which requires R&D workers R&D spills over to total factor productivity via own sector other sectors foreign sectors R&D intensity falls over time in EU baseline growth of services economy relative strong growth of R&D-extensive new member states 4 R&D in WorldScan
R&D in CES production nest 5 R&D in WorldScan
R&D modelling equations 6 R&D in WorldScan
R&D spillover estimates Coefficient Parameter estimate Average elasticity Own sector R&D spillover 0.049 (0.022) 0.049 Other sectoral R&D spillover 0.325 (0.107) 0.074 Foreign R&D spillover 0.868 (0.233) 0.056 Total 0.180 N=2250; R 2 = 0.183; Lejour, A.J. and R. Nahuis (2005), R&D spillovers and growth: specialisation matters, Review of International Economics, 2005 7 R&D in WorldScan
Very high social rate of return 90% gross internal rate of return; this is at the high end of the spectrum Estimates from macro-data typically are in the range of 20-100% Estimates from micro-data typically are lower and in the range of 20-40% (they capture less spillovers) Thus: as the social rate of return exceeds the private rate of return government interventions that promote R&D may improve economic welfare 8 R&D in WorldScan
Implementation of the spillover estimates in WS Originally, the coefficient for spillovers within the own domestic industry was set to zero to prevent double counting (with the contribution to production of the own R&D capital stock) Later on it was shown that double-counting fears were in part unwarranted and a coefficient value of intrasectoral spillovers of 0.026 was introduced Visser, S., R&D in WorldScan, CPB Memorandum 189, 2007 9 R&D in WorldScan
Modification of production nest for value added (1) 10 R&D in WorldScan
Modification of production nest for value added (2) 11 R&D in WorldScan
.. and introduction of wage differential between highskilled and R&D workers Hence, the impact of heavy subsidies on R&D will partly evaporate into wage increases for R&D workers Rojas-Romagosa, H., Modelling Human Capital formation in WorldScan, CPB Memorandum 244, 2010 12 R&D in WorldScan
Objective five Lisbon highlights Economic effects of reaching Lisbon targets on economic growth sectoral structure Five targets employment, R&D, human capital, administrative burden, services directive What-if: targets reached by assumption! no assessment of realism costs of policy only partly included Uncertainty R&D: lower and upper bound for social returns to R&D See: Gelauff, G.M.M. and A.M. Lejour, Five Lisbon highlights; the economic impact of reaching these targets, CPB document 104, 2006 13 R&D in WorldScan
R&D expenditures in 2003, selected countries (% GDP) 14 R&D in WorldScan
Five Lisbon highlights: R&D simulations Target: EU expenditure at 3% GDP in 2010 - increase in R&D stock proportional to GDP until 2020 - after 2020: falling R&D (services economy) - at country level an upper limit of 4.5% is imposed Spillovers in two scenarios - lower bound: social return to R&D 30% - upper bound: social return to R&D 90% Instrument: subsidy on user costs of R&D 3% expenditure target met over 2010-2020 at EU-level 15 R&D in WorldScan
Five Lisbon highlights: two R&D scenarios, 2025 (% difference to baseline) low (30%) high (90%) R&D stock 66.1 74.1 country range: 0-300% GDP 3.2 10.1 productivity impacts Consumption 1.2 7.0 Exports 5.9 16.0 R&D sectors produce tradeables Real wages 3.1 9.5 16 R&D in WorldScan
Effects of five Lisbon targets, EU, lower bound, 2025 (%) 17 R&D in WorldScan
Conclusions WorldScan R&D modelling A highly stylized reflection of R&D practice Showing the role of R&D as a growth promoter Based upon empirical foundations (spillover estimates, elasticities value added nest, wage elasticity of R&D workers) Five Lisbon highlights showed - What would have happened if a miracle would have occurred GDP increase: 12-23 % Consumption increase: 9-19% R&D ranks second as a vehicle for growth -... but miracles do not exist targets were very ambitious potential role of policy instruments remains rather uncertain 18 R&D in WorldScan