In her last post, Katharina pointed to a great data source on R&D expenditure, GERD. In the comment section of that post we discussed the issue of cuts in government R&D expenditures. An interesting question in this context is whether public R&D expenditure is a complement to private R&D expenditure or a substitute. If it is a complement, cuts in the public R&D budget are very bad, because they can be expected to be followed by cuts in private research budgets. If it is a substitute, public R&D ‘crowds out’ private R&D, so that public cuts are not that bad because they can be expected to be replaced by private R&D.
There is an extensive literature on this question, yielding mixed results. So I asked myself what does GERD say? The figure below shows a scatterplot of government and private expenditure on R&D as a share in GDP for 36 countries in 2008. You can see that the data points are pretty much all over the place (Austria is marked red). It turns out that if you regress private on public R&D expenditure, you get a positive coefficient indicating complementarity. However, the coefficient is not statistically significant (t-ratio of 1.63) and the R-squared is very low. So we have no strong evidence for complementarity, but also no evidence for substitutability. Instead, what my recreational econometrics exercise suggests is that private R&D expenditure is pretty much independent from government research budgets.
In part 1 we have established that growth in the West relies on innovation and technology much more than growth in developing countries. We are the ones at the technology frontier, so if we want to grow, we need to be more innovative. In this blog I’ll mainly cover government policies regarding R&D and higher education, focusing a lot on expenditure (1). If you’re interested in broader measures, you could start here, with the Innovation Union Scoreboard 2014.
For those of you who like the big numbers, let me introduce you to GERD. GERD is the Gross Domestic Expenditure on R&D, which includes expenditure by business enterprises, governments and foreigners. In 2010 GERD stood at 245 673 million in absolute terms in the EU-27. Given that this does not really tell us much, GERD is normally calculated relative to GDP. Between 2000 and 2010 the ratio has roughly been flat at around 1.80-2% of GDP. This means that internationally the EU-27 figures are below those in other countries: Japan (3.45%), US (2.80%).2 There are also substantial differences within the EU. The highest expenditures in 2010 were reported from (how could it be different) Finland (3.87 %), Sweden (3.42 %) and Denmark (3.06 %).
Over the past couple of months a number of things have been happening, which made me want to start writing a blog. So, when I finally sat down and started writing on one of them I realised that the topics are all linked and can be wonderfully put together under one question: „Are we being stupid?“ If I had to give this series a more technical title then it would be something along the lines of „Are Europe’s efforts to stay competitive appropriate to ensure the future growth of the region“, but, let’s face it, „are we being stupid?“ is a much more catchy title and regarding some of the things I’ll be talking about also way more appropriate. I wanted to jump right in, but some of you may have very little background in economics or economic growth, so I’ll use part I to put the whole debate into context (by heavily oversimplifying things!!!). By the end of this blog you should know why Western economies are innovation-driven and why that matters. In part 2 we’re getting more to the core of the issue about how innovative Europe is in comparison to other developed countries. Part 3 is a proposal for the changes I consider necessary. Let’s get started…
I’m currently doing some work on evolutionary economics without really having gotten far beyond the basics. I am certain this stuff is great and important, but all the books always kind of loose me at the point where too many “statistical moments” come in, I am asked to solve non-linear differential equations and I find myself spending most of my time reviewing how the rules of integration work. I’m terrible at math, is what I’m saying. But the book by Stanley Metcalfe on my desk at the moment still seems a really terrific introduction into the topic. What really fascinated me, however, is something only marginally related to the models themselves. Something so blatantly obvious when you think about it yet so cleverly hidden that I had never noticed it with this clarity. One of economists’ favorite words is actually nothing but a farce in most standard economic models: we speak of competition where there really is none!