R&D, the National Innovation System, and Growth William F. Maloney Office of the Chief Economist, LAC Joint work with M. Bosch and D. Lederman See 2003 flagship: Closing the Gap in Education and Technology

5 Questions 1. How strong is LAC’s innovation effort in comparative terms? Lederman and Saenz data set (2003) 2. Is this optimal given potential impact on growth? 3. What determines levels of R&D investment? 4. How efficiently does LAC use this invesment? 5. Why are we not Finland?

R&D/GDP vs. GDP/Capita

R&D Superstars

More flexible benchmarking GDP, GDP^2, pop, pop^, time dummies Median regression against outliers Residuals against conditional median give performance measure Regional data good for LAC, Asia, OECD, Israel.

Residuals from Benchmarking Regression: Asia

Latin America Do NR offer fewer opportunities for innovation?

Advanced Countries: X- NR

Advanced Countries:X-Manufac.

Finland: Rise in R&D Generalized 23%

Do Returns to R&D Justify Efforts of Superstars? US firm level/industry data- social returns Grilliches and Lichtenberg % Terleckyj 1980, Scherer 1982 >100% X country -Coe and Helpman 1995 G7 123% Lederman and Maloney: extend to LDCs Five year period averages, countries GMM system estimator (Blundell and Bond 1998, Arellano and Bover 1995)

Estimating Rate of Return to I, R&D Derived from production function Ratio of r s /r k = R&D*/R&D US: 28%/7% = rise by 4 X. ( Jones and Williams 1998) Interact with GDP/capita

Estimation Five year period averages, GMM system estimator (Blundell and Bond 1998, Arellano and Bover 1995) Instrumenting Simultaneity responsible for high ROR?

Rate of return to R&D ROR R&D ~78%

Predicted Rates of Return LAC should invest 2.5 to 10 times more in R&D !!

So: Returns justify R&D of superstars NR good for growth and higher ROR Consistent with From Natural Resources to Knowledge Economy- successful NR countries very innovative. ROR higher in poorer countries Question: Why don’t poor countries invest more?

Why do Rich Countries Invest More in R&D?

What Determines R&D? GDP per capita positive despite decreasing returns IP protection, credit markets, more public R&D expenditures key- eliminate impact of GDP/capita Natural resources have negative impact

In sum: Fast growing LDCs took off in R&D effort Most LDC’s should invest 2-10 times more given rate of return Weak intellectual property rights, credit markets, public effort, weak academic institutions, poor public/private collaboration all contribute. NR- higher impact but lower levels

LAC’s efficiency of converting R & D into patents,TFP is also low Patents = B 1 R&D + B p country*R&D % -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% ARG BRA CHLCOL CRI MEX PER URY VEN TWN KOR ISR FIN NOR

Human Capital University Think Tanks/ Antenna Firms Innovation & TFP Growth Other Public Policies: Rules of the Game Infrastructure (ICT) Subsidies/Tax incentives Coordination Initiatives Global Knowledge Economy National Innovation System Innovation Clusters Global Knowledge Economy

Most R & D $ and scientists in universities but collaboration with private sector is low (interviews with entrepreneurs: score 1-7)  Finland: 40% have formal arrangements with U; Chile: 25% and not very fruitful  Public think tanks poor and captured  60% R&D funds dedicated to basic science; US 15%

Why are we not Finland? Not addressing serious mkt failures in innovation Few incentives to R & D - tax breaks, subsidies Weak efforts to help firms learn Incubators, research parks, consortia Disfunctional NIS: Explains more dynamic NR sectors in Scandinavia. see From Natural Resources to the Knowledge Economy (2001) LAC’s NIS-closer to the Holy Roman Empire than Finland. No mkt forces assure elements of NIS work together

Latin America’s Challenge for the next decades… Increase tertiary ed. in science/engineering Encourage private R&D: further openness and deregulation, IPR and competitive subsidies for R&D Reorient present R&D toward applied sectors; reform university incentives. Networks: University/firms linkages; sectoral innovation clusters; international connections Lubricants: start up/VC capital, labor market reform

FIN