Journal of Economics Bibliography

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Volume 2 September 2015 Issue 3

The Role of Research and Development in Economic

Growth: A Review

By Jangraiz KHAN †
Abstract. This paper reviews the role of Research and Development in the economic
growth. The paper links back the story of economic growth to the studies of 17th and 18th
century. The role of Research and development was confirmed in the models like Romer
(1987), Romer (1990), Aghion & Howitt (1992), Grossman & Helpman (1991) and Barro
& Sala-i-Martin (2004). In 1990s and 2000s, the empirical investigations made it a
significant factor of economic growth. It is therefore conclude on the basis of the reviewed
literature that Research and development play a significant role in the economic growth of a
country.
Keywords. Research and Development, Economic Growth, Human Capital
JEL Class. O31, O32, O47.
.

1. Introduction

T
he theory of economic growth has its foundationsin the seminal work of
Adam Smith (1776), David Ricardo (1817), Malthus (1798), Ramsey
(1928), Young (1928) and Schumpeter (1934). Later on with the passage of
time, it took new directions. The introduction of Research and Development and
imperfect competition began with the models of Romer (1987), Romer (1990),
Aghion & Howitt (1992), Grossman & Helpman (1991) and other similar works
(Barro & Sala-i-Martin, 2004). In 1992, Aghion & Howitt developed a model of
endogenous growth by including the role of R&D in economic growth. This model
used the idea of creative destruction. It assumes that the individual research can
also affect the whole economy. The model derived equilibrium through forward-
looking difference equation. It means that the pace of research in a period depends
on present research and on the productivity of research. The research firms get
monopoly rent of their innovations, which are replaced by future innovations. Each
innovation result in a new intermediate good, which is then used to produce final
good more efficiently. This study analyzed the positive and static properties of
stationary equilibrium with R&D. Economic growth is the result of innovations,
skilled Labour force and productivity of research.
According to Engelbrecht (1997) human capital enters into production not only
as a factor of production but also as the endogenous theories predicted. Therefore,
human capital and R&D has diverse role in domestic innovation and international
spillover of knowledge. This spillover leads to economic growth. Fagerberg,
Verspagen & Caniee (1997) used simultaneous equation model to find the
interrelationship between GDP per capita growth, employment growth and
†
Elementarya nd Secondary Education Department, KP, Pakistan.
+2348069786727
[email protected]
 Journal of Economics Bibliography
innovation with technology diffusion in various regions of Europe during the
period 1983-89. GDP per capita and unemployment proved to be inversely related
as poor regions faced higher level of unemployment rates. The net inward
migration showed positive relationship with GDP per capita growth. The backward
regions have very little emphasis on R& D and raise in R&D expenditure is very
crucial for growth of poor European regions. It will accelerate growth of these
regions without effecting growth of any other region. The R&D expenditures
growth should be supported by high quality of institutions
Borensztein, Gregorio & Lee (1998) analyzed empirically the role of Foreign
Direct Investment (FDI) in technological diffusion and economic growth by
developing a model of endogenous growth. The data was taken for 69 developing
countries from Barro & Lee (1994), International Monetary Fund (IMF) and
Organization for Economic Co-operation (OECD) publications for the period
1970-89. The study investigated the channels through which the FDI inflow from
industrialized countries can affect economic growth. The study concluded that FDI
is more productive in those countries where the human capital accumulation is
comparatively low. This shows the affect of FDI on economic growth through the
improved human capital and technology diffusion. The education and FDI are
strongly and positively related. The aim of this paper is review the theoretical and
empirical literature to find the role of R&D in economic growth.

2. The Research and development and Economic growth

Literature
According to Blackburn, Huang & Pozzolo (2000), R&D leads to inventions
and innovation, this improves the quality of manufacturing and updating of existing
technologies. The model used the ideas of the models developed by Lucas (1988),
Uzawa (1965), Grossmann & Helpmann (1989), and Romer (1990). The model
recommends accumulation of skills and knowledge for people in an economy in
order to get economic growth. Human capital accumulation not only accelerates
economic growth but also provides incentives for research and innovations. It
improves the quality of manufacturing.
Frantzen (2000) supports the view that both R&D and human capital play a
significant role in Total Factor Productivity. Both domestic and foreign R&D show
a significant impact on TFP but the impact of domestic R&D played more
significant role in growth in richer countries as compared to smaller economies.
Ballot, Fakhfakh & Taymaz (2001) studied the effects of human and
technological capital on productivity of firms in France and Sweden economies by
using Generalized Method of Moments (GMM). Panel data for the period 1987-
1993 was used which was taken from large Swedish and French firms. The study
used R&D and Human capital stock as inputs in the model. Technological capital
was measured by R&D and human capital by firms sponsored training. The results
show significant role of human and technological capital in determination of firm’s
productivity in Sweden and France. The interaction effects between R&D and
human capital stock were not found robust. The study suggested the importance of
training as input for France. R&D showed more significant result in Sweden as
compared to France. The rate of return for R&D was found 38% for France and
32% for Sweden which within the range as in industrial countries. Zeng (2001)
developed a multi-sector dynamic general equilibrium growth model to view the
role of innovation and imitation in economic growth. This model assumed
investment in innovation and imitation endogenous. This model considers
innovation and imitation in same sector at same time. Changes in these variables
occur in natural way. This model shows that subsidy to innovation will push

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economic growth and subsidy to imitation will move it in opposite direction. The
welfare consequences of innovation and imitation are not sure.
Chou (2002) examined the contribution of research and development, and
human capital in Australian economy using country-level data during the period
1960-2000. This model shows that long run steady state growth is the result of
local as well as global research and development of new ideas. The growth
accounting method was used for the analysis. The study concluded that the growth
of Australian per capita income is not totally due to factor accumulation but also
due to enhancing efficiency of transformation of inputs into outputs. 28 % of
growth was due to educational attainment and 27-57 % due to research intensity in
Australia as well as in G-% countries. Australian economy is expected to continue
its growth and the R&D will continue its role in economic growth of Australia.
Jones (2002) introduced world of ideas in his growth model. This model states
that the economic growth of an economy in long run depends on globally
developed ideas. The hoard of ideas in long run is directly proportional to the
worldwide research and the population of that economy. The model was applied to
United States economy. The US economic growth per capita remained almost
constant in last century but stock of human capital increased to great extent. The
sources of economic growth in US include education, R&D, world population
growth and other factors. The education, health and related factors explain about
80% of US economic growth while 20% of growth is result of world population
expansion. In future the contribution of research (Ideas) will continue for sometime
and market for ideas will expand. The world population will resultantly become
sufficiently skilled.
Lee (2005) assessed Korean economy by using methods of growth accounting
and level accounting. The results show that output per worker gap between Korea
and United States has been fallen during past three decades. The study finds Korea
on path of sustained growth due to increasing stock of human as well as physical
capital. The manufacturing industries got good pace but the performance of the
service industry is not up to the mark. The study suggested Korean economy to
increase R&D expenditure for innovation in technology and improve quality of
education so that desired level of growth may be achieved. For educational quality,
improvement is needed in educational institutions and their management.
Liberalization of educational institutions and inter school competitions can be
helpful in achievement of desired goals.
Kwack & Yang (2006) analyzed Korean growth experience from neoclassical
growth perspective. Annual data for the period 1971-2002 was used for this
purpose. Investment rate, R&D, Education and size of government emerged as
major determinants of longrun economic growth in Korea. The Study provided
evidence for endogenous growth theory. The study showed that public and
household’s expenditure on education and R&D investment are major contributors
to innovation and improving quality of labour. Higher dependency ratio of youngs
and older people adversely affected Korean growth rate. Improvement of political,
cultural and social institutions was recommended to achieve longrun sustained
economic growth rate.
Ornaghi (2006) analyzed the role of knowledge spillovers in the productivity
and demand of firms. The model modified the Griliches (1979) approach by
introducing demand equation in production function. The model concludes that
knowledge spillovers improve the quality of product produced by firms and it adds
to the productivity of firm. The study finds difference technology innovation and
process innovation. The former’s effect was found greater than the latter one. The
model gives justification to subsidies to R&D small and medium projects as
adopted by several industrialized countries.
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Grossman (2007) developed a model to find the contribution of R&D subsidies
and publicly provided science education to economic growth. The study concluded
that R&D subsidies may not contribute economic growth and public welfare and
the intertemporal knowledge spillovers are the externalities of Firms expenditure
on R&D. The subsidies to R&D increase income inequality. The model confirmed
that publicly provided education aiming at higher skills in science and technology
will contribute positively to economic growth of a country. As public education
contributes to economic growth more efficiently than R&D subsidies, therefore, it
was suggested to develop R&D through promotion public education of scientists
and other skilled persons.
Afza & Nazir (2007) worked on the role of human resource management in
economic competitiveness in South Asian economies with special reference to
Pakistan. It was observed that Pakistan did not avail the golden opportunities
created by globalized world. Weak skill base is one of the major factors keeping
Pakistan away of taking advantages from global markets. The study suggested
improvement in skill base, expansion of education and training, and development
of R&D for better economic consequences. Basic education is key to for human
resource development in Pakistan. It was also suggested to accelerate the
manpower export to reduce poverty and improve macroeconomic indicators.
Similarly, integration of available physical and human capital and joint
technological ventures can reduce the regional economic disparities to a great
extent.
Falk (2007) developed a dynamic empirical model to know significance of
R&D investment in long run economic growth of OECD countries using panel data
set. The study provided a new evidence for R&D-economic growth relationship.
The results were derived through GMM (generalized method of moments). The
study investigated whether higher R&D investment push economic growth keeping
investment ratio, industrial R&D intensity and human capital constant. Five yearly
and ten yearly averages were used. Higher R&D investment was found positively
related to GDP growth in working age populations. The results were robust in both
5-year and 10-year cases.
Goel, Payne, & Ram (2008) premeditated the trends in various components of
R&D and its contribution to economic growth in USA by using disaggregated data
of half century. Surprisingly, USA experienced decline in defense R&D outlays
and federal R&D expenditure. The non-federal R&D funding expanded sharply
during the period. Interestingly, the estimation showed strong association of
economic growth to federal R&D expenditure rather than non-federal R&D
outlays. The economic growth posed strong relationship to defense R&D instead of
non-federal R&D. The study proposed substantial push up in defense R&D and
non-federal R&D in USA for sustainable economic growth.
Kuo & Yang (2008) examined the effects of knowledge capital and technology
spillover on regional economic growth in China. The results showed that R&D,
capital and technology import contribute significantly to economic growth in
China. The elasticity of R&D to economic growth was as large as of technology
showing same contribution to economic growth of China. The study suggests the
existence of R&D spillover as well as international knowledge spillovers. Tax
incentives, financial assistance and R&D grants can be helpful tools to encourage
research activities and innovation in economy. Similarly policies which encourage
investment in education and job training were were recommended for China.
Sterlacchini (2008) conducted a study to find out the association of regional
disparities in R&D and higher education with regional economic growth. The data
was taken from197 regions of 12 European countries for the period 1995-2002.The
empirical evidence supported positive and significant impact of knowledge,
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educational attainment and intensity of R&D expenditure on economic growth of
European regions. The results showed that equal growth opportunities in EU
regions may not be achieved by only gearing investment in public and private
education. R&D expenditures were found significant only in most developed
regions of EU. Therefore to reap the benefits of innovation and knowledge, public
support for higher education and R&D can be effective tool. The study concluded
that weak relationship between public universities and business firms may be one
of the most important reasons keeping European Union (EU) regions away from
reaping the fruits of R&D and higher education.
Jin (2009) analyzed the causal relationship between rising research productivity
and economic growth in five Asian countries by using Granger causality
framework. The relationship was found bidirectional in Hong Kong. Hong Kong is
small open economy offering numerous kinds of services and tertiary education
may have direct and immediate effect on services in management and other sectors.
In Japan, the relationship was unidirectional as from economic growth to Research
and productivity. In Korea and Taiwan, research productivity caused economic
growth during the study period. Singapore with a small number of higher education
institutions has limited number of publications and that the reason that research-
economic growth relationship is not significant. Khan & Khattak (2013) suggested
the development of R&D in Pakistan for sustained economic growth.

3. Conclusion
The review of theoretical and empirical studies relevant to the role of R&D in
economic growth of countries around the world agree on the significant role of
different form R&D in productivity or economic growth. Therefore, it can be
conclude that the developing countries should concentrate on R&D to achieve the
sustained economic growth.

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