UNIVERSITÄT POTSDAM - Prof. Dr. Paul JJ Welfens

If the large degree of risk and uncertainty in the innovation process as well as
information asymmetries between capital markets and R&D spenders are taken into
account, it is not surprising that large social returns to R&D can coincide with relatively
low rates of R&D investment. JONES / WILLIAMS (1997) conclude for the
USA that the optimal amount of R&D investment is about four times the amount actually
invested. However, other studies found less overwhelming empirical evidence.
BARTELSMAN ET AL.(1996) applied the Jones / Williams model to Dutch manufacturing
firm-level data and found that the private rate of return probably underestimates
social returns by only a few percentage points. Examining the effects of R&D on productivity
in a panel of French and US manufacturing firms, MAIRESSE / HALL
(1996) found that R&D earned a normal private rate of return in the USA during the
1980s. For selected sectors of German manufacturing, BÖNTE (1998) concluded that
his results provide no evidence for “above-normal” rates of returns due to intraindustrial
spillovers.
Another important source for externalities is international R&D spillovers, i.e.
the impact of foreign R&D on domestic productivity and output. COE / HELPMAN
(1995) captured these effects by augmenting the above mentioned total factor productivity
equation with import-weighted foreign R&D stocks. For West Germany they
calculated elasticities of total factor productivity with respect to foreign R&D of 0.056
(1971), 0.072 (1980) and 0.077 (1990). The elasiticities for France were a little bit
lower: 0.045 (1971), 0.061 (1980) and 0.067 (1990), whereas the elasticities for Sweden
were higher: 0.067 (1971), 0.087 (1980) and 0.093 (1990). BAYOUMI / COE /
HELPMAN (1999) applied the same approach to a larger sample of countries and
found important differences between the values of the coefficients for domestic and
import-weighted foreign R&D for different groups of countries. Comparing the G-7
countries and small industrial countries, the coefficient of import-weighted R&D stocks
has the same value, but the coefficient for domestic R&D turned out to be much
smaller for small industrial countries. For developing countries they assume that R&D
capital is constant, and the coefficient of import-weighted foreign R&D turned out to
be clearly higher. To the extent that the Internet stimulates business-related services
trade in particular and trade in general, the Internet might have trade-related growth
effects.
Next one has to consider different possibilities of financing R&D. R&D can either
be financed by companies or by government, and there is a lively controversy
about the effects of government-financed R&D on output and productivity. In his
summarizing overview GRILICHES (1995) concluded that most elasticity estimates
are not sensitive to whether one uses total or only company-financed R&D stocks, but
that there are other indications in the data that government-financed R&D produces less
benefit than privately-financed R&D. Concretely, he presents estimations where the
privately versus government-financed R&D mix variable has a significant positive co-
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