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Why research and development is so important for economic growth, according to the IMF

IMF: Why research & development is so important for economic growth

The epidemic has halted decades of economic growth and wreaked havoc on government budgets. To rebuild properly and combat climate change, significant public investment must be funded in a long-term manner. Long-term growth, and hence tax income, has never been more important.

But what are the factors that contribute to long-term growth? One of the most essential factors is productivity, or the capacity to produce more outputs with the same inputs. We stress the significance of innovation in driving long-term productivity growth in our most recent World Economic Outlook. Surprisingly, despite consistent gains in research and development (R&D), a proxy for innovation effort, productivity growth in industrialized nations has been falling for decades.

International knowledge transfer is a key driver of innovation.

According to our findings, the mix of R&D has an impact on growth. We discovered that fundamental scientific research has a greater impact on more sectors, in more countries, and for a longer period of time than applied research (commercially oriented R&D by companies), and that access to overseas research is especially essential for emerging markets and developing economies. Easy technology transfer, cross-border scientific collaboration, and policies that subsidize basic research might all contribute to the sort of long-term growth that we want.

Inventions draw on basic scientific knowledge

While applied research is critical for bringing new products to market, basic research develops the knowledge basis required for breakthrough scientific advancement. The discovery of COVID-19 vaccinations, for example, has aided in the reopening of numerous countries, possibly injecting trillions into the global economy in addition to saving millions of lives. The development of mRNA vaccines, like other important discoveries, depended on decades of collected expertise in several disciplines.

Basic research isn’t linked to a certain product or nation, and it may be integrated in a variety of ways and applied to a variety of disciplines. This implies it is more extensively disseminated and relevant for a longer period of time than applied knowledge. The disparity in citations between scientific papers used for fundamental research and patents demonstrates this (applied research). Scientific papers have an eight-year high in citations, but patents have a three-year peak.

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Emerging markets and developing economies rely heavily on spillovers.

While advanced economies perform the majority of fundamental research, our findings show that information transfer between nations is a key driver of innovation, particularly in emerging markets and developing economies.

Emerging markets and developing countries rely on international research considerably more than local research for innovation and prosperity (basic and applied). The projected effect of foreign technology adoption on productivity growth—through trade, foreign direct investment, or learning-by-doing—is particularly high in nations with strong education systems and extensive financial markets. As a result, emerging markets and developing countries may discover that policies aimed at adapting foreign knowledge to local conditions are a better path to success than investing directly in domestic fundamental research.

We can tell if this is true by looking at statistics on research stocks, which are indicators of accumulated knowledge based on research spending. As seen in the graph, a 1% increase in foreign fundamental knowledge boosts yearly patenting in emerging market and developing nations by 0.9 percentage points more than in established economies.

Productivity increase is fueled by innovation.

What is the significance of patenting? It serves as a proxy for assessing innovation. A 1% increase in patent stock can result in a 0.04 percent improvement in productivity per worker. That may not appear to be a lot, but it adds up. Over time, little increments enhance living conditions.

According to our calculations, a 10% permanent increase in a country’s own fundamental research stock can boost productivity by 0.3 percent. The impact of a similar increase in foreign basic research stock is greater. The rate of increase in productivity is 0.6 percent. The impact on emerging markets and developing economies is likely to be considerably greater because these are merely average figures.

Fundamental science also plays a bigger role in green innovation (including renewables) than in filthy technology (such as gas turbines), implying that measures to support basic research can aid in the fight against climate change.

Policies that will lead to a more prosperous and inclusive future

Private businesses tend to underinvest in fundamental research because they can only capture a tiny portion of the uncertain financial benefit, making a strong argument for government involvement. However, creating the proper rules, including deciding how to fund research, may be difficult. It may be inefficient, for example, to support fundamental research solely at universities and public labs. There would be a loss of potentially significant synergy between the commercial and governmental sectors. It may also be difficult to separate fundamentals from applied private research in order to solely fund the former.

Our study demonstrates that a hybrid strategy that doubles private research subsidies (basic and applied) while tripling governmental research spending may enhance productivity growth in advanced economies by 0.2 percentage point per year. Better targeting of fundamental research funding and tighter public private collaboration might enhance this even further, at a lesser cost to the public purse.

Within a decade, these investments would pay for themselves and have a significant influence on earnings. If these investments had been undertaken between 1960 and 2018, per capita incomes would have been roughly 12% higher than they are now.

Finally, because of the significant spillovers to developing markets, ensuring the free movement of ideas and collaboration across borders is critical.