A new study by Laura Bottazzi and Giovanni Peri confirms the importance of increased spending on research and development (R&D) for the innovation that drives productivity growth. Not only does increasing its own R&D resources improve a typical OECD country''s innovation; it can also benefit from increased R&D and innovation in
other OECD countries.
The study, which is published in the March 2007 issue of the Economic Journal, finds that:
- A 1% increase in resources devoted to R&D in a country translates into higher innovation (patenting) rates for that same country in the order of 0.3-0.6%. Most of that effect is realised within five years of the increase in R&D.
- At the same time, there is a very important role for international diffusion (''spillovers'') of innovations: a 1% increase in innovation by the technological leader, the United States, induces 0.35% higher patenting in other OECD countries also within five to ten years.
Economists agree that scientific and technological innovation is an extremely important determinant of the economic outcomes of countries. In the long run, innovation underlies the phenomenon of productivity growth, which is the key factor in the growth of income per person in industrialised countries.
In the short and medium term, booms and busts in scientific and technological innovation underlie periods of fast economic growth or periods of economic slowdown. For example, fast innovation in information and communication technology (ICT) contributed importantly to the excellent productivity performance of US firms during the 1990s, while the delay in developing and adopting ICT in continental Europe is thought
to be a leading cause of its lukewarm productivity performance in the same decade.
In spite of its importance, the process of innovation is still not very well understood. Economists have only recently addressed fundamental questions such as: how much does R&D spending by a country translate into more scientific innovation in that country? How long does it take for R&D spending to affect innovation? How much does
innovation in technologically leading countries stimulate R&D and innovation in other countries? This study contributes to answering them. Usually economists have used some measures of growth in labour productivity to
capture technological progress. This study tackles the outcome of the innovation process more directly using patent applications (weighted by their scientific importance, expressed by citations) as measures of innovation in a country.
The researchers consider innovation in each of 15 OECD countries in the period 1973- 1999 as the outcome of a research process the main inputs of which are R&D resources and existing ideas.
As patented innovations are known internationally, the study accounts for the important feedback mechanism that ideas generated in any country can be used by researchers in other countries to produce more innovation. This is the very important mechanism of ''spillovers'' in knowledge, which propagates and multiplies the benefits of scientific innovation.
''The International Dynamics of R&D and Innovation in the Long Run and in the Short Run'' by Laura Bottazzi and Giovanni Peri is published in the March 2007 issue of the Economic Journal.