UNIVERSITÄT POTSDAM - Prof. Dr. Paul JJ Welfens

3.2. Empirical Links Between Innovations and Output
The empirical investigation of the effects of technological change or more generally
innovation on economic growth has produced a voluminous and diverse literature.
Roughly, there are three types of studies: historical case studies, analyses of invention
counts and patent statistics, and econometric studies relating output or productivity to
R&D or similar variables (GRILICHES, 1995). Here, we will confine ourselves to
econometric studies, which use some indicator variables to approximate the impact of
technological change and innovations.
First, one important input factor for technological change and innovation can
serve as a proxy variable: R&D. Most research in this vein uses an augmented Cobb-
Douglas production function which includes some kind of a R&D stock besides the
usual production factors. The coefficient belonging to this R&D stock can then be interpreted
as production or output elasticity of R&D. Alternatively, this kind of production
function is transformed into growth rates, and the R&D intensity (R&D/Y) is included.
The parameter belonging to this R&D intensity yields the rate of return to
knowledge. Similar to these approaches is another procedure where total factor productivity
is calculated first. Then again, either the logs of levels of total factor productivity
are linked to some kind of log R&D stock or the first differences of log total factor
productivity are regressed on the R&D intensity. The interpretation of the estimated
coefficients is the same as before: the regression of the levels of log total factor productivity
on a log R&D stock yields a measure of the elasticity of output to knowledge,
while the regression of total factor productivity growth yields a measure of the social
gross (excess) rate of return to knowledge (GRILICHES / LICHTENBERG, 1984 and
GRILICHES, 1995).
A general problem for the measurement of the effects of R&D on output is that
a number of externalities arise in the innovation process. Summarizing the relevant
literature on this topic, CAMERON (1998) distinguishes between four kinds of externalities.
First, a standing on shoulders effect which reduces the costs of rival firms because
of knowledge leaks, imperfect patenting, and movement of skilled labor to other
firms. In a wider sense international technological spillovers due to foreign trade can
also be considered as within the standing on shoulders effect. Secondly, there exists a
surplus appropriability problem because even if there are no technological spillovers,
the innovator does not appropriate all the social gains from his innovation unless he can
price discriminate perfectly to rival firms and/or to downstream users. Thirdly, new
ideas make old production processes and products obsolescent: the so-called creative
destruction effect. Fourthly, congestion or network externalities occur when the payoffs
to the adoption of innovations are substitutes or complements. This is sometimes called
the stepping on toes effect. The adequate consideration of these effects in empirical
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