Measuring Innovation Performance in Developing Countries Reinhilde Veugelers KULeuven, EC (BEPA) & CEPR

Optimal R&D intensity to maximize output? From an extended Cobb-Douglas production function, the optimal R&D/GDP ratio depends on  Purchase price of R&D  R&D elasticity of output  Risk-free interest rate  Rate of R&D depreciation

Actual R&D to GDP ratio: Wide variation in levels across countries, even in EU Variation in growth rates across countries, even in EU No clear sign of convergence, even in EU ??? Common target of 3% ???

Zooming in on the country differences in R&D/GDP Variation in R&D elasticity of output The sectoral dimension: high-tech sectors (ICT..)with higher returns (higher opportunity, measurement issues)

EU-US Gap in R&D Spending EU-US Gap in Specialization (VA) EU-US Gap in Productivity Growth Rates Total High Technology Manufacturing (ICT) (Non-ICT) Source : ECFIN, Annual Review 2004 Comparison of EU-US difference in R&D spending and Productivity Growth (US=1)

Linking R&D intensity and Productivity Growth Divergence bt countries in productivity growth can be related to  Higher R&D intensity in most sectors  Larger weight of R&D intensive sectors  Better growth performance in R&D sectors Country divergence in R&D/innovation output

Beyond R&D: Innovation: Creation and diffusion (European Innovation Scoreboard Indicators) 1. Human resources S&E graduates, Population with tertiary education, Participation in life-long learning, Employment in medium-high and high-tech manufacturing, Employment in high-tech services ) Participation in life-long learning, Employment in medium-high and high-tech manufacturing, Employment in high-tech services ) 2. Knowledge creation Public R&D expenditures (GERD - BERD) (% of GDP)Public R&D expenditures (GERD - BERD) (% of GDP) BERD) (% of GDP (by source of funding), EPO&USPTO high-tech patent applications; EPO&USPTO patent applicationsBERD) (% of GDP (by source of funding), EPO&USPTO high-tech patent applications; EPO&USPTO patent applications 3. Transmission and application of knowledge SMEs innovating in-house, SMEs innovating in-house, SMEs involved in innovation co-operation, Innovation expenditures 4. Innovation finance, output and markets Share of high-tech venture capital investment,Share of high-tech venture capital investment, Share of early stage venture capital in GDP, SMEs sales of 'new to market' products, SMEs sales of 'new to the firm but not new to the market' products, Internet access/use, ICT expenditures, share of manufacturing value-added in high-tech sectors, volatility-rates of SMEs, TBP, High tech imports- exportsShare of early stage venture capital in GDP, SMEs sales of 'new to market' products, SMEs sales of 'new to the firm but not new to the market' products, Internet access/use, ICT expenditures, hare of manufacturing value-added in high-tech sectorsolatility-rates of SMEs

Differences in Country Dispersion between R&D and Innovation

Country heterogeneity in growth: catching up?

The policy perspective: How to improve innovative capacity? creation and diffusion Beyond stimulating R&D investments Improving Technology Transfer/Diffusion ( Eg ISL mechanisms, absorptive capacity of users, investment in complementary assets) Networking Among Actors on a Global Scale: research, firms, finance, policy makers,… Framework conditions, especially  clear IPR regimes and standards;  flexibility in product markets (easy of entry), labour markets (labour mobility),venture capital markets This requires a Systemic Policy Approach

To feed systemic policy approach: A call on theory, data, econometrics: The right variables at the right level? What are the driving forces for innovative capacity? Do we have data on this  Esp diffusion capacity variables Which country ideosyncracies matter to explain differences in  Levels of driving forces  Effects of driving forces Sectoral composition Time dimension (eg initial levels, catching up Firm composition Institutional setting… Policy environment Systems approach: interactions