u.

eSI 2Li
Public Disclosure Authorized

POLICY RESEARCH
WORKING PAPER 1221
Public Disclosure Authorized

Does Research and Acrossall cotntries, more

researchand develoment

Development Contribute (R& iviydosno

to
E,conomic Growth coetibUte to highlerincomef.
to Economic GrowthRHigher income, t.owever,

in Developing Countries? does leadto moreR&D

activity,suggesting
that R&D
Public Disclosure Authorized

becomes important only after

Nancy Birdsall a countryreachesa certain
Changyong Rhee For
stage of development.
developing countries, it
appears that countries that
are behind grow by catching
up technologically, not by
advancing the technological
frontier.
Public Disclosure Authorized

The WorldBank
PolicyResearchDepartnent

November1993
POLICY RESEARCH WORKING PAPER 1221

Summaryfindings
UsingUNESCOAatafor researchand developnient
(R&lD)expendiruresand personnel,Birdsalland Rhee
document international differer.cesin R&l) a-:tivities
and assessthe determinantsof these differencesand
the link between R&I) and ecotiomic growth.
For a group of OECDcotiuitries,R&D activityand
economicgrowthiare correlatedfor one of their two
proxies.Contrary to the findingsof Romerand
Lichtenberg,however, they are not corielated acros,
all (includingdeveloping)countries.
Moreover,even for OEC( countries,it appears
likelythit economicactivityaffectsR&D activity
raitherthan vice versa.First, thtre is no evidencethat
R&D in the OFCD in the early yearsof 1970-85
contributedto growth durmngthe whiioleperiod.
Second,the anralysisof deteriniiianitsof R&D activities
suggeststhat levelof incomeaffectsR&D activities;
appairentlyR&D becomesimportantonly after a
coointryreachesa certain stage ot development.
For developingcountries,the authors' resultsare
consistentwith the widespreadview,first proposed by
(Gershenkron.that countries ti.it are b hind grow by
catchingup technologic,ally, not by ad-ancing the
technologicalfrontier.

This paper - a product of rhe Officeof the Director,PolicvResearchDepartment- is part of a larger effort in the
departmentto assessthe sourcesof growthacrosscounitries.Copiesof tthepaper areavailablefreefromthe World Bank,
1818 H Street NW, Washington,DC 20433. Pleasecontact SushmaRajan, room NI 1-045, extension3,3747(25
pages).November 1993.

The Policy Research Working PaperSeriesdisseminatesthe findings of uworkin progressto e:courage the exchangeol ideasabout
developmentissues.An objectiveof theseriesis to get the findingsout quickly, eveni. thepresentations
are lessthan fully polished.The
paperscarry the namesof the authorsand shouldbeusedand citedaccordingly.Thefindings,interpretations.and conclusionsare the
authors' oumand should not beattributed to the World Bank,its ExecutiveBoardof Directors,or any' of its membercountries. J
Producedby the PolicyResearchDisseminationCenter
 ConimentsWelcome

DOES R&D CONTRIBUTETO ECONOMICGROWTH

IN DEVELOPINGCOUNTRIES?

Nancy Birdsalland Chan3yongRhee*

* World Bank and Universityof Rochester. This paper was completedwhile the first author,
now at Inter-AmericanDevelopmentBank, was Director, PolicyResearch Department,World
Bank and the second author was visiting the World Bank as a VisitingResearchFellow.
 1. Introduction

R&D (research and development)activity is generallyacknowledgedas a likely source of

economicgrowth, given it is a critical input to technologicalprogress, and given evidence

from firm and industry level studies of healthy rates of private and social returns (Mansfield

[1977], Jaffe [1986]). Yet except for Romer[1989]and Lichtenberg[1992], we know of

virtually no other cross-countrystudiesof economicgrowth that incorporatecountry-leveldata

on R&D activity -- despite a recent resurgencein the growth literature, incorporatingan

increasing array of economic,socialand political variables.'

The paucity of studies reflects in part the relativelypoor state of country-levelR&D

data that is sufficientlycomparablefor internationalcomparisons. For this paper, we

developed such daLaby undertakingcountry-by-contryadjustmentsto informationmade

available by UNESCOon R&D expendituresand personnelat the countrylevel.2 On the

basis of our adjusted data, we assess empiricallythe link betweenR&D activityand economic

growth, and we analyzethe determinantsof R&D differentialsacross countries. We find that

growth in R&D activity and economicgrowth are positively correlated,but only across

OECD countries (conttraryto the findings in Romer [1989]and Lichtenberg[1992]). And

even among OECD countriesthere is no evidencethat R&D activity causes economicgrowth.

Our cross country analysisdoes show a robust empirical link betweenR&D activitiesand the

level (not growth rate) of income,suggestingthat R&D activitiesbecomeprominentonly after

a country reaches a certain stageof development.

'See, for example,Easterly(1993),Levineand Renelt(1992),and Barro(1991).

2Our adjustmentswere madeon the basisof detailson definitionsand exclusionsthat are includedin the
footnotesto the publishedUNESCOdata.
 We believeour findings are fully consistentwith the view that growth in developing

countries is largely a matter of technologicalcatch-up, as first proposed by Gerschenkron,i.e.

based on learning from and adapting technologiesdevelopedelsewhererather than on

advancing the technologicalfrontier.3 This probablyrequires eytensive investmentsin

educationand training, including in engineering,but not extensiveR&D activity.

The paper is organized as follows. SectionII describesour data. Section III sets out cross

country analysis of the growth-R&i) ink, and SectionIV sets out our analysisof R&D

differentialsacross countries. SectionV concludes.

(I. Data

The first internationalattemptto standardizethe definitionof R&D and the

measurementof R&D inputs was made by OECDmember countries at a conferencein

Frascati, Italy, in 1963. The resulting "FrascatiManual" has provided the basis for OECD's

collecting and publishingR&D data on a regular basis. Since 1969, UNESCOhas published

standardizedR&D statisticsfor some developingcountries, based on the Frascati concepts.

We use the published UNESCOsources, plus a supplementaryUNESCOtape, for our

country R&D data.4

3Pageand Pack(1993)distinguish
betweentechnological
catch-upand increasesin "technicalefficiency"and
showthat the most successfuleconomiesof East Asiahavegrownprimarilyon the basisof the former. Their
findingis consistentwith the view of Romer(1989)that growthis affectedby the transferof ideas, and the
empiricalfindingof KimandLau(1993)thattherehasbeenlittleor no increasein TFPgrowthin EastAsia,when
TFPgrowthis definednarrowlyas increasesin technicalefficiency.
'We are gratefulto Mr. MortonM. Brownof the statisticalofficein the UNESCO,Parisfor providinga
supplementarvtape.

2
 We use measures of R&D inputs, rather than outputs. Within a country the difficultyof

measuringR&D inputs is well known. The concept itself is bard to define; according to the

OECD definition, the main criterion to distinguishR&D inputs from related scientific

activities is "the presence in R&D of an appreciableelementof novelty" (Frascati Manual

(1981]). There are no adequate measuresof R&D output.' Much of R&D output is in the

form of newly improved conmnoditieswhosequality-adjustedprice indices are rarelv

available. A significant portion of R&D output is producedin industiies such as health,

deferse, and space, where extemalitiesare large and are difficultto measure and capture

statistically.

To measure R&D inputs, we constructa stock variableand a flow variable:

(i) Personnel: As a r%roxyfor the accumulatedstock of R&D capital, we use the number

of scientists and engineers employed in R&D activities.

(ii) Expenditures:As a proxy for the changein R&D stock, we use gross domestic

expenditureon R&D. Followingcommnop--actice, we ignorethe depreciationand lagged

6
effects of past R&D investments.

5 Thereis no internationallyagreedsystemof outputmeasurement.TWO indicators,the numberof patent

ap;licationsand thetechnicalbalanceof payments,areavailableforOECDmembercountriesfor a limitedsamp!e
peiiod.
6
IntheUNES ) yearbooks,thesemeasuresarebrokendownby specialization (naturalscience,socialscience,
etc.),sectorof performance(privateindustries,universities,
thegovernments), sourceof funds(government funds,
and specialfunds,etc.), and typeof R&Dactivity(fundamental
productiveernterprise research,appliedresearch,
in definitionsacrosscountriesand tle shorter
etc.). 1Themorespecificthe measure,the largerare the differences
are availablesampleperiods.
3
 Even for the basic R&D input proxies, some nationalspecificationsvary from the

intemationalnorms set out in the Frascati Manual. Detailsof differencesbetweennational and

in. rnationalspecificationsare set out in footnotesof the UNESCOStatisticalYearbookand

the supplementarytape. On the basis of individualfootnotes', we exclude countries(or

observations)if their specificationis too different from the irternationalnorm. For example,

we exclude the expenditureand manpowerdata for Greece and the manpowerdata for

Norway since they do not include R&D activitiesin private productivesectors. We exclude

Fiji, French Polynesiaand Tonga since their data relate to one research instituteonly.

At the same time, to avoid excludingtoo many countries, we permit some variation in

the R&D input definitions. The most severe exampleof this is the manpowervariablefor

several countries, includingJapan, which is based on the numberof physicalpersons, rather

than the internationalstandardof full time equivalentpersons.The R&D personnelfor Japan

are as a result estimatedto be overstated by about 30 percent, according to other studies.8

Our data set consistsof manpowerand expendituredata for 21 OECD countriesand 19

developing countries, whose sample periods differ widelyacross countries. Table I shows the

sample averagesand the growth rates of our R&D inputproxies for each :ountry. The first

two columnslist the average and the annualgrowth rates of R&D expendituresas a

percentage of GDP between 1970 and 1985. The third column shows the average of the

number of scientistsand engineers (employedin R&D activities)per millionpopulation

'The proportionof footnotedobservations

is large,indicatingtheprimitivestateof intemnational
standardization
of R&Dmeasurement.
'OECD,ProposedStandardPi.cticeforSurveysof Researchand Experimental
Development:
"FrascatiManual
1980",Paris, 1981.
4
 between 1970 and 1975, and the fourth column shows annual growth rates between 1973and

1985. The last two coiBinnsare foi the numberof scientistsand engineersnot normalizedby

population.'

Followingthe OECD convention,Table 1 puts OECD countries into three groups (major,

medium, and small R&D performner)on the basis of the amountof R&D expenditures. The

groups based on R&D expendituresare not necessarilythe same as the groups based on R&D

expenditures as a percentage of CiDP. Table 2 breaks down R&D expendituresby source of

funds and b,- type of R&D activities. The first two columns in Table 2 report the average

ratios of government funded R&D to the sum of governmentaindprivatelyfunded R&D

expenditurcs.'" The last two columnsreportthe awerag. ratios of basic R&D expenditures

to the sum of basic and applied (includingexperimental)R&D expenditures.Data for these

refined categories are available for a smallerset of countries.

Some characteristicsemerge from Tables I and 2. First, R&D activitiesin developing

countries are negligible.The average R&D expenditureas a percentageof GDP between 1970

aa,d 1985 is only 0.36 percent for developingcountries,just 25 percent of the average for

OECD countries of 1.42 percent. Between1970and 1975, the average number of scientists

and engineers employed in R&D activitiesis 172 per million populationfor developing

91ncalculatingsampleaveragesand annualgrowthrates, the numberof observations

includeddiffersacross
countries,and we use our discretionto minimizebiasdue to thedifferencesin sampleperiods.Wetriedto avoid
theconcentration of samplesaroundcertainperiods;if the valuesfor 1985are not available,either 1984or 1986
figuresare used.

10Thesourceof fundscode in the UNESCO

dataset includesothercategoriessuchas foreignfundsandother
funds.Sincetheir proportionis usuallyminimaland we are not sure whethertheyshouldbe treatedas part of
expenditures,we excludethemin calculatingthe ratiosin Table2.
privately-funded
5
countries,just 14 percent of the average for OECD countriesof 1,248 per million population.

Moreover, given that the developingcountriesin our sampleare almost certainly those with

more R&D activity than those not in the sample, the average R&D activity for all developing

countries is almost certainly lower than in our sample.

Second, manpowerproxies indicatethat both the average growth rates and the variance of

R&D activities is higher in developingcountriesthan in the OECDcountr.es. Between 1970

and 1985, the average growth rates of the number of scientistsand engineersper rnillion

populaticnare 3.84 percent for 18 OECD countriesand 6.04 percent for 11 developing

countries. S..andarddeviations are 1.97 and 4.86, respectively.During that period, the growth

rates vf R&D expendituresas a percentageof GDP are not very different between OECD

countries and developingcountries. They are 2.27 percent for 18 OECD countries and 2.42

percent for 11 developingcountries. The standarddeviationsare 1.96 and 5.29, respectively.

Among developingcountries, the average R&D expendituresas a percentageof GDP of India

and Korea are similar in size to those for low incomeOECD countriessuch as Spain,

Portugal, and Iceland. The growth rates of the former are greater.

Thirdly, though high R&D investmentis often regarded as a major factor explaining

Japan's high economicgrowth, Table I indicatesthat Japan s R&D activities, in terms of

R&D expendituresor the growth rates of manpowerindices,do not seem exceptionalby

OECD standards. (Japan's manpowerindicesare overstimated as noted above.) Surprisingly,

even Japan's ratio of applied R&D is not higher than the OECD average. Its ratio of

governmentfunded R&D is lower.

6
 Though not reported in Table 1, the time series of our data shows that R&D expenditures

have grown as rapidly a. or more rapidly than G!)P in the majorityof countries; the R&D

elasticity with resnect to GDP seermls

to be greater than 1. For OECD countries, this series

data also reveal that R&D expendituresstarted to accelerate from the late 1970s,after

faltering in the middle of the decade.

III. R&D and EconomicGrowth

To analyze the relationshipbetweenR&D activitiesand economicgrowth, we use a

simple cross-countryregressionmodel as in Dowrick and Nguyen [1989]:

(1) qi =ao + alk + a2Ri+ a3l1 - a4 InYi* + E,

where qi, ki, RI, and IIare the average annual growth rates of real GDP, capitalstock, R&D

capital stock, and employment,respectively,of country i. Y* denotes initial per capita CDP

of country i relative to a technologicalleader, the UnitedStates, in our analysis.The termnis

included to capture the convergenceeffect, includingthe likelihoodof total factorproductivity

catch-up effects. The reduced form (1) can be easily derived by introducingR&D capital

stock in Dowrick and Nguyen's [1989] productionfunction. Equation (1) can be rewrittento

incorporate the irnvestmrrnt-GDP

ratio by adopting the cormmonpractice of proxyingcapital

stock growth by the average share of investmentin output (I/Q)":

"Thisapproximation
is exactif capital-output
ratiosareconstantacrosscountriesandovertime.Withthesame
logic, if R&D capital-outputratios are constant, we can proxy R in equation(2) by the averageR&D expenditures
as a percentageof GDP.

7
 (2) q! = ao + a,(I/Q); + a2 R, + a31i - a4 InY1j*+ e;

Table 3 presents the OLS regressionresults for equation(2). Definitionsand sources of

variables are summarizedin the appendix.For R1, we use three measures: the growth rates of

the number of scientistsand engineersemployedin R&D activities per milllon pcpulation

(GSCP708S),the growtil rates of the numberof scientistsand engineers not denominatedby

population (GSCi7085),and the average R&D expendituresas a pe ,entage of GDP

(RNDi_Y). Since our R&D proxies are availableonly after 1970, the data are the sample

averages or the growth rates between 1970and 1985.LNDIFF70 is the log of the gap in

GDP per capita in the year 1970,

The first three columns of Table 3 report the regressionresults for the full sample. The

next four columns report the results for OECDcountriesand developingcountries. Consistent

with the results in previous studies (Abramovitz(19861,Baumoland Wolff 11988],Barro

[1991]), we find that high investmentrates are stronglyassociatedwith high GDP growth,

and there is evidence for catch-up in levels of total factor productivity.

As for the growth-R&Dnexus, our results are mixed. The average growth rates of the

number of scientistsand engineers, whetherdenominatedby population or not (GSCP7085,

GSC17085),are significantin explainingGDP growth rates for the full sample and O2CD

countries, but not for the developingcountries. I' e take this evidence at face value, it

suggeststhat R&D activitiesbecome importantonly after a country reaches a certaindegree

of economicdevelopment.

8
 However, the average R&D expenditureas a percentageof GDP (RND _Y) is

insignificantin explainingeconomicgrowth even for OECD countries.BreakingR&D

expenditures into sub-fieldsdoes not alter the rcsult. table 4 eeportsregressionresults when

government funded and privatelyfunded expendituresenter the regressionsseparately.12

They do not provide evidencefor a significantreturn from privatelyfunded or government

funded R&D .Ilestment.

How can our mixed result be best interpreted?One might argue that the expenditure

variable is a better proxy since manpowerirr ices couldbe proxying the changesin human

capital instead 3f R&IDcapital. To check the validityof this argument,we include proxies for

human capital accumulationused in Barro [1991], the primary and the secondaryschool

enrollment rates, in the equation (2). The second column in Table 4 showsthat both the

secondaryenrollnientrates and GSCP7085are significantin explainingGDP growth.'3 The

magnitudeand significanceof the coefficientof GSCP7085do not changeafter the inclusion

of the enrollmentrates. Our measureof the number of scientistsand engineersemployed on

R&D activities is thus probablynot simplyplaying the role of (less educated)human capital.

Of course our proxies may represent highlyeducatedhuman capital, but it would be hard to

distinguishthe inputs of highly educatedhuman capital from R&D capitalanyway.

Moreover, there is a positivecase for choosingGSCP7085or GSC17085over RNDIY.

'2Becauseof thelimitednumberof non-OECDcountryobservations,

wereporttheresultsfor OECDcountries
only. Neitherare appliedandfundamentalR&Dinvestmentssignificantin growthequations,whichis not shown
sinceit coversonly 9 countries.
'3Differentlyfrom Barro [1991],the fact that the primaryschoolenrollmentrates are insignificantin our
regressionis becauseour samnplesare mostlyOECDcountriesand the sampleperiodsof the regressionsis from
1970.

9
 As mentioned in Section 11,since our selectioncriterion ziows a certaindegree of

arbitrariness in national specificationsof R&D measurement,internationalcomparisonof the

levels of our proxies could be misleading.However, if nationalspecificationshave been time-

invariant, comparing the growth rates of our proxies would be less problematic. This
4
argument suggests that GSCP7085or GSC17085are better proxies than RNDIyY."

At the same time, the results in Table 3 cannot be interpretedas demonstratinga causal

relationshipfrom R&D activitiesto economicgrowth. The positive partial correlation between

GSCP7085and economicgrowth may be due to simultaneousequationbias: Growth of R&D

capital stock could simply followeconomicgrowth. In order to control for this possible

endogeneity,we estimatedthe relationshipbetween initial R&D activities at the beginningof

the sample period and subsequenteconomicgrowth, shown in Table 5.

Following Barro [1991] and other cross country studies, we regressedthe growth rates of

real GDP per capita between 1970and 1985on initiallevel of real GDP (GDP70), initial

primary and secondaryschool enrollmentrates (PRIM, SEC), and the ratio of government

spending to GDP (GOV), together with a proxy for initial R&D capital stock,'5 the average

numberof scientists and engineersper millionpopulationbetween 1970and 1975 (SCI_P).

We use the average value between 1970and 1975 becausesome of our sample countriesdo

'"Wethinkthisproblemis morethana measurement errorproblem.First,internationalcomparabilityof RND1-

Y is less problematicamongOECDcountries,but we still have the sameproblemfor OECDcountriesonly.
Second,thepartialcorrelationbetweenRNDI-YandGSCP7085 (GSC17085) is negative.Thecorrelationcoefficient
betweenthemare -0.48,-0.38, and --0.46 for thefullsample,for OECDcountries,and fordevelopingcountries,
respectively.It suggeststhatbothvariablescannotbe usedas a proxyfor thechangeof R&Dcapitalstock.Section
IV furtherdiscussesthis negativefinding.
15Asshownin Mankiw,Romer,andWeil[19921,this specification
can representthe transitionaldynamicsof
a neoclassicalgrowthmodelwithhumanandR&Dcapital.

10
 not have the data for the year 1970. Usingaverage valueshas the additionaladvantageof

avoidinga systematicbias in estimatingthe dependentvariable and the initial values of

independentvariables from a common base year.

The resuit in column 1, Table 5 showsthat SCI_P is not significantin explainingthe per

capita GDP growth rat-. In order to check whetherthis result is due to a different

specificationfrom those in Table 3, the secondcolumn includesthe average investment-GDP

ratio and GSCP7085in the regression. We confirmthe previous result that the average

investmentratio and GSCP7085are significantexplanatoryvariables, but still the initial R&D

stock, SCI P, is insignificant.The third columnreports the same conclusionfor the OECD

countries only.'6

The last three columns in Table 5 test parameterstabilityover time. Given a possible lag

in the effect of R&D on economicgrowth, the fourthcolumn regresses per capita GDP

growth rates between 1975and 1985on the sameset of independentvariables, whose initial

values are for the year 1970. Also, from previouscross country studies of growth,

we know that the fit of the regression is muchbetter if the sample periods are extended back

period; the dependent variableis the

to the 1960s.The fifth regression extendsthe samnple

GDP growth rate for the period 1960 to 1985. and the initialvalues for independentvariables

(except SCI_P) are the flgures in the year 1960. Note that the estimatedcoefficientof SCI_P

'6Barroand Lee[1993]reporta similarfindingforthedataset includingover 100countries.Theyfindthatthe

attainmentat higher(ratherthansecondary)
initialvaluesof educational foreconomicgrowth,
levelare insignificant
evenfor OECDcountries,andconcludethat "humancapitalin theformn of highereducationwouldbe unimportant
for mostcountries,whichtendtoadoptleadingtechnologies ratherthaninventfundamentally newthings"[p.14-15].
Thedifferencebetweentheir highlyeducatedhumancapitalstockvariableandoursis thatoursincludesonlythose
employedin R&Dactivities.
11
 sould be biased upwardsince SCI_P is the average value in the middle of the sampleperiod.

In both cases, however, SCI P is not correlatedwith economicgrowth. The results for OECD

countries and developingcountriesare not different (not reported in Table 5).17

The finding that our proxies for initial R&D activities are not correlated with economic

growth contrasts sharply with Romer [1989] and Lichtenberg[1992] who use the same

UNESCO data set. Romer [1989] finds a positive correlationbetweenthe initial number of

scientists and engineersemployed in R&D activitiesand subsequenteconomicgrowth.

Lichtenberg [1992]finds that the ratio of privately funded R&D expendituresto GNP is

highly correlated with economicgrowth in a sampleof 59 countries, thoughgovernment

funded R&D expendituresare not.

We believe their results should be treatedcautiouslybecause of probabledata problems

and possible resultingselectionbias. Lichtenberg[1992] includesmany developingcountries

that have just one annualobservationon the R&D expenditure/GNPratio, and uses the one

observationas an average for the whole sampleperiod. Availabledata for other countriesare

often too concentratedaround certainperiods to represent an average value for the period

1970 and 1985. Both authors include countrieswhosespecificationsdiverge considerablyfrom

the internationalnorms explainedin SectionII.

The combinationof results from Tables 3 and 5 suggeststhat the positive

'7Our findingsinTableSare notsensitiveto White'sheteroskedasticerrorcorrection,inclusionof otherproxies

for politicalstabilityand marketdistortionsusedin Barro[1991],andthechoiceof R&Dproxies.Usingthenumber
of scientistsand engineers(not denominated by population)or averageR&Dexpenditurein percentageof GDP
between1970and 1975,withouta goodtheoreticalreason,as a proxyfor initialR&Dcapitaldoes not alter the
conclusions.
12
 contemporaneouscorrelation betweenour proxies for R&D activities and economicgrowth

(Table 3) is capturing the positive effect of economicgrowth on R&D activities-- tne reverse

of the expectedcausation. Higher initialR&D activitiesdo not necessarily lead to subsequent

economicgrowth (Table 5).

Is this result contradictory!o numerousmicro-studies,which documenthigh returns to

R&D expenditures at the firm or industrylevel?(Griliches [1984], Jaffe [1986], Mansfield

[1977])At face value, our results suggestthat high private returns to R&D expendituresin

micro-studiesdo not reflect high social returns. They may result from enhancedmonopoly

power of a firm at the cost of its competitors.Alternatively, it may be that evidenceof high

returns fromr,micro studies of firms and industriesin highly developedcountries, mostly the

UnitedStates, does reflect social gains, but such gains to R&D activities become important

only after a country or a firm advancesto a technologicallyleadinggroup."8

IV. Determinantsof R&D Expenditures

This section analyzes what variablesare importantin explaininginternationaldifferences

in R&D expenditures as a percentageof GDP. The issue itself is interesting. In addition, this

analysisprovides an indirecttest of the quality of our data. If large measurementerrors or

differences in national specificationsare a major reason for our previous finding, it is less

likely that we will find meaningfuldeterminantsof our R&D proxies.

18 Theother explanationmay be the poor qualityof standardization

the R&Dproxies. International in
measuringR&Dactivitiesis still in the experimentalstage.TheUNESCOdata, evenwithadjustments,maynot
providean adequatebasisfor studyof theeffectsof R&Don growthcompared,for example,to otherdata,such
as thoseon educationenrollments,that routinelyusedin studiesof growth.

13
 In Table 6, the dependentvariablein the first two regressionsis average R&D

expendituresas a percentageof GDP between 1970 and 1985 (RNDI_Y). The results show

that the initial level of per capita GDP (GDP70)and the initial numberof scientists and

engineer in R&D activitiesper millionpopulation(SCI_P) are major factors explainingcross

country differentialsin R&D expenditures.We find that GDP70 or SCI_P alone can explain

61 percent or 75 percent of the cross country variation. It is interestingto note that the

average share of physical investmentin GDP is not a significantfactor once the initial level of

GDP is controlled, though it is significantwithoutGDP70. Other variablessuch as export

share, governmentexpenditureshare, and proxies for initialhumancapital are not significant

in explainingthe variation of RN'D1_Y,and their inclusiondoes not alter the results. The

results for the OECD countriesare similar.

The finding that the R&D expenditureshare is strongly relatedto the level of income and

the level of initial R&D stock is not surprising. A country with higher per capita GDP (larger

physicalcapital stock) should have a lower marginal productivityof physicalinvestment,and

therefore, a larger incentiveto invest in R&D, which can alleviatethe diminishingmarginal

productivityof physical capital. In contrast, the positive effect of initialR&D stock suggests

that the marginalproductivityof R&D capital is not diminishing,i.e., there are constant or

increasingreturns to R&D investment. This is consistentwith the view that huge fixed costs

are involvedin R&D investment.

The third and the fourth columnsreport the results when privatelyfunded and government

funded R&D expendituresto GDP ratios are used as dependentvariables, respectively. They

show qualitativelythe same results with those for total R&D expenditures.The finding is not

14
 surprising, consideringthe high correlationcoefficient(0.70) betweenprivatelyfunded and

government funded R&D expendituresto GDP ratios.'

The last two colurrns in Table 6 show typicalregression results when the dependent

variable is the growth rates of the numberof scientistsand engineers per millionpopulation

(GSCP7085). As expectedfrom our previous regressionsin Table 3 and 5, the per capita

GDP growth rate is a significantdetermninant

of GSCP7085.In fact, we find other variables

we used in this paper are not robustlyrelated to GSCP7085using Levine and Renelt's [1992]

approach to assessingrobustness.Note that GSCP7085is negativelyrelatedto the initial level

of income, GDP70, which is a major determinantof R&D expenditures.Ex post, this finding

illustrates the reason for the negativecorrelationbetween our manpowerand expenditure

proxies for R&D activities(see footnote 14). We believe that R&D activitiesare income-

elastic and led by high incomecountries, consistentwith the results in columns 1-4.

Therefore, at least for the OECD countries, expendituredata appearsto provide a better

proxy for growth in R&D activitiesthan manpowerdata. At the same time, the finding in

columns 5 and 6 confirmsour earlier suppositionof reverse causality, i.e., growth of income

induces growth of R&D manpowerindices in all countries.

VI. Conclusions

Using the UNESCOdata for R&D expendituresand personnel, this paper documents

internationaldifferences in R&D activitiesand assessesempiricallythe link betweenR&D and

economic growth, and the deterninants of R&D differentials.Within our group of OECD

'The correlation coefficientbetweenfundamentalR&D andapplied R&D expendituresto GDP rations is 0.89.

15
countries, R&D activity and economicgrowth are correlatedfor one of our two proxies.

Contrary to the findings of Romer [1989] and Lichtenberg[1992], however, they are not

correlated across all, includingdevelopingcountries. Moreover, even for OECD countries, it

is likely that economicgrowth affects R&D activityrather than vice versa. First, there is no

evidence for OECD countries that R&D activityat the beginningof the period 1970-85

contributedto subsequentgrowth during the period. Second, our analysisof the determinants

of R&D activities shows a robust link betweenthese activitiesand the level of income,

suggestingthat R&D activities become importantonly after a country reaches a certain stage

of development.For developingcountries, our results are consistentwith the widespread

view, first proposedby Gerschenkron, that countriesthat are behind grow by catchingup

technologically,not by advancingthe technologicalfrontier.

16
 Appendix:Definitionsof Variables in Table 1-6

AVG EX70: Averageratio of exports to GDP for the years 1960-85;from World
Bank BESD.

AVG17085:Averageratio of public plus private investmentover GDP for the years

1970-85; from Barro [1991].

GOV7085: average ratio of real government "consumption"expenditureto real GDP

for the years 1960-85; from Barro [1991]

GRNDI_Y: governmentfunded expenditureson R&D as a percentageof GDP;

average for the years 1970-85;calculatedfrom UNESCOdata set.

GR7085:growth rates of GDP per capita, in 198W)

$US, for the years 1970-85; from
World Bank BESD.

GrP70: GDP per capita in 1980 $US, for the year 1970; from World Bank BESD.

GPOP7085: growth rates of populationfor the years 1970-85;from World Bank

BESD.

GRSCP7085:growth rates of the number of R&D scientistsand engineers per million

populationfor the years 1970-85;calculatedfrom UNESCOdata set.

GRSC17085:growth rates of the number of R&D scientistsand engineers for the

years 1970-85; calculatedfrom UNESCOdata set.

LNDIFF70: log differencebetween GDP70 of each country relative to U.S. GDP70.

PRND1_Y:privately funded expenditureson R&D as a percentageof GDP; average

for the years 1970-85;'calculatedfrom UNESCOdata set.

PRIM: primary school enrollmentrate; from Barro [1991]

RND_Y: Expenditureon R&D as a percent of GDP; averageduring the period 1970-

75; calculatedfrom UNESCOdata set.

RND1 Y: same as above for the years 1970-85.

SCI_P: average numberof R&D scientistsand engineersper millionpopulation for

the years 1970-75; calculatedfrom UNESCOdata set.

SEC: secondaryschool enrollmentrate; from Barro [1991]

TGDP7085:growth rates of GDP, in 1980$US, for the years 1970-85;from World

Bank BESD.

17
 References

Abramovitz, Moses, "CatchingUp, Forging Ahead, and Falling Behind," Journal of

EconomicHistory, XLVI (June 1986), 385-406

Barro, Robert, " EconomicGrowth in a Cross Sectionof Countries," Quarterly

Journal of Economics, CVI (1991), 40743

Barro, Robert and JongwhaLee, "Sourcesof EconomicGrowth," miineo, Harvard

University, April 1993.

Baumol, William and Edward Wolff, "Productivity,Growth, Convergence, and

Welfare: Reply," American EconomicReview78, December 1988, 1155-59.

Dowrick, Steven, and Duc-Tho Nguyen, "OECD ComparativeGrowth,"

American EconomicReview, LXXIX (December 1989), 1010-30.

Easterly, William, "ExplainingMiracles:GrowthRegressionsMeet the Gang of

Four," presented at the NBER's Fourth AnnualEast Asian Seminar on Economics,San
Francisco, June 17-19, 1993.

Griliches, Zvi, R&D, Patentsand Productivity,Chicago: Universityof ChicagoPress,

1984.

Jaffe, Adam B., "TechnologicalOpportunityand Spilloversof R&D: Evidencefrom

Firms' Patent, Profits, and Market Value," AmericanEconomicReview76, (December
1986),984-1001.

Kim, Jong-II, and Lawrence Lau, "Sourcesof EconomicGrowth of the Newly-

IndustrializedCountries on the Pacific Rim," presentedat the "Conferenceon the Economic
Developmentof the Republicof China and the Pacific Rim in 1990 and Beyond," Taiwan,
China, 1993.

Levine, Ross, and David Renelt, "A SensitivityAnalysis of Cross-CountryGrowth

Regressions," American EconomicReview 1(4) (September,1992), 942-963.

Lichtenberg, Frank R., "R&D Investmentand InternationalProductivityDifferences,"

NBER Working Paper #4161, September 1992.

Mankiw, Gregory, David Romer, ani David Weil, "A Contribution to the Empirics
of EconomicGrowth," QuarterlyJournal of Economics107, (May 1992), 407-38.

Mansfield, Edwin, The Productionand Applicationof New Industrial Technology,

New York: N.W. Norton, 1977.

OECD, ProposedStandardPracticefor Surveysof Researchand Experimental

Development: "Frascati Manual 1980", Paris, 1981.

1o
 Page, John and Howard Pack, "Accumulation,Exports, and Growthin the High
PerformingAsian Economies," presentedat the Carnegie-RochesterConferenceon Public
Policy, 1993.

Romer, Paul, "What Determinesthe Rate of Growth and 1'echnologicalChange?,"

working paper #279, The World Bank, September 1989.

UNESCO. *StatisticalYearbook, Paris, 1963-present.

19
 TABLE : R&D INPUTS

[1]Expenditure in [2] Researchers per 3] Number of

0 of GDP mill. population Researcheru

(1) avg(%) (2)growth() (3)avg (4)growth() (5)Avg (6)growth

(1970-85) (1970-85) (1970-75) (1970-85) (1970-75) (1970-85)

OECD
Countries
Major R&D
Performer
U.S. 2.44 0.79 2523.6 1.30 531516 2.27

Japan 2.16 2.70 3230.9 3.06 349323 4.04

Germany 2.29 2.32 1550.2 4.96 95379 3.73

France 1.89 1.33 1207.5 3.14 62678 3.69

U.K. 2.15 0.71 1400.3 n.a. 78193 n.a.

Medium R&D
Performer
Italy 0.84 1.85 605.3 4.45 33054 4.83

Canada 1.15 0.66 1006.1 3.00 22073 4.11

1.97 0.07 1730.1 1.92 23117 2.62

Netherlands
Sweden 2.01 4.89 1497.9 5.24 12207 5.46

_.28 2.74 1481.5 3.64 9496 3.76

Switzerland
Australia 1.05 -0.66 1838.6 0.05 24600 1.43

Belgium 1.48 1.1S 1328.9 1.55 12925 1.81

Small R&D
performer
Austria 0.99 4.93 617.4 4.67 4640 4.78

Norway 1.33 2.57 n.a. n.a. n.a. n.a.

Denmark 1.05 1.75 959.8 3.97 4804 4.21

Finlend 1.08 3.96 1247.6 6,30 5828 6.72

New n.a. n.a. 852.7 n.a. 2549 n.a.

Zealand
Ireland 0.75 0.41 687.2 3.75 2129 5.00

Spain 0.35 6.13 219.3 5.93 7570 6.80

Portugal 0.35 1.16 223.7 3.93 2050 4.77

Iceland 0.61 5.94 756.8 8.29 161 9.34

LDCs
Argencina 0.38 3.23 289.7 1.84 7300 3.38

Ecuador n.a. n.a. 92.1 n.a. 569 n.a.

Egypt n.a. n.a. 299.4 2.62 10665 5.17

Ghana n.a. n.a. 359.9 n.a. 3260 n.a.

Guatemala 0.24 8.78 47.6 n.a. 269 n.a.

India 0.51 5.95 76.2 7.64 44412 7.50

Iran n.a. n.a. 128.9 -3.01 3829 0.40

Jordan 00.32 -3.64 78.9 3.95 207 6.65

20
 tl] Expenditure in (2] Researchers per (33 Number of
% of GDP mill. population Researchers

(1) avg(%) (2)growth(%) (3)avg (4)growth(V) 'S)Avg W6growth

(1970-85) (1970-85) (1970-75) (1970-85) (1970-75) (1970-85)

Korea 0.57 8.79 192.4 11.74 6533 13.31

Mauritius 0.40 -6.53 127.7 6.86 107 8.20

Mexico 0.32 6.33 98.8 7.70 5417 10.67

Nigeria n.a. n.a. 35.0 n.a. 2066 n.a.

Peru 0.34 -3.07 131.4 11.00 188S 13.52

0.19 0.23 n.a. n.a. n.t. n.a.

Philippines
Singapore n.a. n.a. 228.2 13.01 502 14.38

Sri Lanka 0.17 0.34 n.a. n.a. n.a. n.a.

Sudan n.a. n.a. 153.3 n.a. 2311 n.a.

Trinidad & 0.53 6.21 n.a. n.a. n.a. n.a.

Tobacco
Uruguay n.a. n.a. 419.7 3.09 1150 2.74

Total Avg 1.04 2.32 770.13 4.68 38188 5.70

OECD Avg 1.41 2.27 1248.27 3.84 64214 4.41

LDC Avg 0.36 2.42 172.45 6.04 5655 7.81

21
 TABLE3: R&D and Economic Growth(1)

Dependent variable: TGDP7085

Indep (1) (2) (3) (4) (5) (6) (7)

variables ALL ALL ALL OECD OECD LDCS LDCS

Constant -0.022 -0.022 -0.001 -0.0007 0.011 -0.054 -0.030

(-2.14) (-2.16) (-0412) (-0.103) (1.307) (-1.80) (-0.53)
AVG17085 0.153 0,148 0.133 0.052 0.075 0.236 0.161
(3.84) (3.87) (3.22) (1.99) (2.62) (2.57) (0.92)
GPOP7085 0.461 0.273 0.126 1.343 0.846 0.487 0.175
(1.36) (0.87) (0.33) (4.21) (2.35) (0.64) (0.14)
LNDIFF70 -0.008 -0.008 -0.007 -0.004 -0.0022 -0.015 -0.010
(-2.46) (-2.66) (-2.46) (-1.62) (0.55) (-1.96) (-1.39)
GSCP7085 0.')016 0.0017 0.0012
(2.C7) (2.41) (0.79)
GSC17085 0.0018
(2.49)
RNDI Y -0.004 -0.0049 0.0414
_ 0.67 0.69 (-0.947 (-1.76) (0.66)
R2 0.67 0.69 0.47 0.(5 0.66 0.74 0.43
D.W. 1.56 1.60 1.34 1.87 2.09 1.65 1.18
of obs. 28 28 30 18 |_20 10 10

Figures in parenthesisare t-statistics.

For the definitions of variables, see appendix.

22
 i.able 4: R&D and Economic Growth

Dependent variable: TGDP7085

Independent Variabes (1) (2)

l__________________ OECD OECD
Constant 0.00 77 -0.0091
(0.965) (-0.646)
A VG17085 0.0792 0.0433
(2.982) (1.743)
GPOP7085 0.5783 1.2389
(1.703) (4.056)
LNDIFF70 -0.0039 -0.0063
l ________________________ (-1.083) (-2.22)
Gov't funded R&D -0.0008
(-0.142)
Privately Funded R&D 0.0034
_____
_____ ____ ____ ____ _ ___ ____ ____ (-0. 740)

GSCP7085 0.0197
(2.93)
SEC 0.0197
(1.97)
PRIM -0.004
(-0.367)
R2 0.0683 0.81Q
D. W 1.63 1.305
L of observation 18 18

23
 Table 5: Growth 4 Initial R&D Capital

Dependent (1) (2) (3) (4) (5)

Variable/
Independent GR7085 GR7085 GR70S5 GR7585 GR6085
variable All All OECD All All

Constant -O 0093 -0.0241 0.0147 -0.026 -0.0049

(-0.46) (-0.80) (1.020) (-1.060) (-0.413)

Initial GDP -0.0048 -0.002 -0 .0021 -0.0059 o .0074

___ _ ______ _ (-2.26) (1.54) (-2.61) (-2.26) (->.967)

SEC 0.0544 0.032 0,0215 0.056 0.0424

(1.992) (1.44) (1.88) (1.66) (;.133)

PRIM 0.0305 -0.0065 0.0093 0.0373 0.0447

(1.429) (-0.272) (0.847) (1.438) (3.898)

GOV -0.0467 0.0310 -0.0299 -0.0022 -0.0430

(-0.759) (0.506) (-1.211) (-0.029) (-0.935)

SCI_P -0.000 0.000 0.000 0.000 0.000

(-0.200) (0.034) (0.202) (0.405) (0.254)

AVGI7085 0. 1257
(2.496) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

GSCP7085 0.0027
(2.810)
R_ _ 0.363 0.601 0.485 0.327 0.530

D.W. 1.48 1.29 2.02 1.72 1.67

#of obs. 36 29 20 36 36

24
 Table 6: Determinants of R&D Expenditures

Dependent (1) (2) (3) (4) (5) (6)

RND1 Y RND1_Y PRND1_Y GRN !. Y GSZP7085 GSCP'085
variab/e/ Alif ALL ALL .. ALL ALL
Independent
Variab,'e
Constant -0.439 0.145 -0. 755 -0.014 10. 36 8.871-
(-0.88) (0.36) (-1.42) > 0.04) (3.00) (2.3.)

GDP70 0.228 0.097 0. 129 0.120 -0.335 -0.105

(5.31) (2.26) (3.06) (4.49) (-1.33) (-0.31)

GR7085 8.625 3.908 8.152 i.695 94.52 101.71

(1.08) (0.62) (1.12) (0.36) (2.35j (2.50)

AVGI7085 0.163 -2.545 1.301 -0.624 -14.72 -8.982

(0.C8) (-1.65) (0.77) (-0.5c' (-1 24) (-0.68!

AVG EX70 -0.854 0.748 0.104 0.243 1.766 -0.039

(-1.03) (0.92) (O.10) (0.39) (0.29) (0.00C

GOV7085 2.007 1.434 0.529 0.132 -199.64 -18.028

(1.00) (0.95) (0.24) (O 09) (-1 63) (-1.49)

SCI_P 0.0006 -0,001

(4.72) (-1.02,

2
R 0.65 0.84 0.48 0.63 0.3 _ 0.42

D.W. 1.92 2.00 2.08 1.60 1.85 1.84

# of obs. 29 25 21 21 26 26

25
 Policy Research Working Paper Series

Contact
Thtle Author Date for paper

WPS1208 PrimarySchoolAchievementin Levi M. Nyagura October 1993 I. Conachy

Englishand Mathematicsin AbbyRiddell 33669
Zimbabwe:A Mufti-LevelAnalysis

WPS1209ShouldEastAsia Go Regional? ArvindPanagariya October 1993 D. Ballantyne

No, No, and Maybe 37947

WPS1210 TheTaxationof NaturalResources: RobinBoadway October 1993 C. Jones

Principlesand Policy Issues Frank Flatters 37699

WPS1211Savings-InvestmentCorrelations NlanduMamingi October 1993 R. Vo

and CapitalMobilityin DevelopingCountries 31047

WPS1212 The LinksbetweenEoonomicPolicy Ravi Kanbur October 1993 P. Attipoe

and Research:ThreeExamplesfrom 526-3003
Ghanaand SomeGeneralThoughts

WPS1213JapaneseForeignDirect Investmern: KwangW. Jun November1993 S. King-Watson

RecentTrends,Determinants,and Frank Sader 33730
Prospects HaruoHoraguchi
HyuntaiKwak

WPS1214Trade,Aid, and Investmentin Sub- Ishrat Husain November1993 M. Youssef

SaharanAfrica 34637

WPS1215How Much DoDistortionsAffect WilliamEasterly November1993 R. Martin

Growth? 39065

WPS1216Regulation,Instautions,and Alice Hill November1993 D. Evans

Commitment:Privatizationand ManuelAngelAbdala 38526
Regulationin the Argentine
Telecommunications Sector

WPS1217 UnitaryversusCollectiveModels Pierre-AndreChiappori November1993 P. Attipoe

of the Household:Timeto Shiftthe LawrenceHaddad 526-3002
Burdenof Proof? John Hoddinott
Ravi Kanbur

WPS1218 Implementation
of TradeReformin John Nash November1993 D. Ballantyne
Sub-SaharanAfrica: HowMuchHeat 37947
and HowMuchLight?

WPS1219 DecentralizingWater Resource K. WilliamEaster November1993 M.Wu

Management:EconomicIncentives, RobertR. Hearne 30480
Accountability,and Assurance

WPS1220 DevelopingCountriesand the BernardHoekman November1993 L. O'Connor

UruguayRound:Negotiationson 37009
Services
 Policy Research Working Paper Series

Contact
Title Author Date for paper

WPS1221 DoesResearchand Development Nancy Birdsall November1993 S. Rajan

Contributeto EconomicGrowth ChangyongRhee 33747
in DevelopingCountries?

WPS1222TradeReformin Ten Sub-Saharan FaezehForoutan November1993 S. Fallon

Countries:Achievementsand Failures 38009