Template-type: ReDif-Paper 1.0 
Author-Name: Soete, Luc
Author-Email: soete@merit.unu.edu
Author-workplace-name: UNU-MERIT, and Maastricht University
Author-Name: Verspagen, Bart
Author-Email: verspagen@merit.unu.edu
Author-workplace-name: UNU-MERIT, and Maastricht University
Author-Name: Ziesemer, Thomas
Author-Email: ziesemer@merit.unu.edu
Author-workplace-name: UNU-MERIT, and School of Business and Economics, Maastricht University
Title: The productivity effect of public R&D in the Netherlands
Abstract: Using a vector-error-correction model (VECM) with endogenous stocks for 
	 total factor productivity (TFP), domestic and foreign public and private 
	 Research and Development (R&D) as well as the GDP from which current 
	 resources are taken, we find that for the Netherlands for the period 
	 1968-2014, extra investment in public R&D has a clear positive effect on 
	 total factor productivity growth. Taking into account the costs of these 
	 extra investments, we find that the rate of return to such a policy is 
	 positive and generally high. Including private R&D in the policy from 
	 the beginning is better than increasing public R&D alone and private R&D 
	 only following.  
	 Transitory and permanent shocks to only domestic public R&D in 1971 show 
	 positive effects on private domestic and foreign private and public R&D, 
	 total factor productivity and GDP. Under a permanent shock to the growth 
	 rate of domestic public R&D by 0.005 (an additional half percentage 
	 point on the baseline growth rate), TFP is 27.5% higher than baseline 
	 after 70 years, and the GDP is 61% higher because a higher TFP also 
	 attracts international capital one-to-one with GDP. Foreign private R&D 
	 reacts much more positively then foreign public R&D. Private R&D capital 
	 increases by up to 5.5% compared to baseline and returns to baseline in 
	 the long run. The internal rate of return is 131 percent obtained 
	 already in 1988. If domestic and foreign public R&D are increased by the 
	 same permanent shock of 0.005, there are positive effects for thirty 
	 five years in domestic private R&D but permanently so for all other 
	 variables; TFP would have been higher by 0.56% and GDP by 9.4%, much 
	 less than under the first strategy without the symmetric and 
	 simultaneous foreign policy. The rate of return is 4-6 percent for 
	 horizons 2014, 2024, and 2040 because of higher gains in later periods. 
	 If domestic and foreign public and private R&D growth get a shock of 
	 0.0025 (each an additional quarter of a percent on baseline) TFP 
	 increases by 13 percent until 2040, GDP by 28 percent and the internal 
	 rate of return is 77%.
Keywords:  Research and Development, Innovation, Public R&D, R&D policy, R&D
	 investment, return on investment, rate of return
Classification-JEL: O38, O30, O32, H41
Series: UNU-MERIT Working Papers
Creation-Date: 20170508
Number: 2017-021
File-URL: https://unu-merit.nl/publications/wppdf/2017/wp2017-021.pdf
File-Format: application/pdf
File-Size: 275 kb
Handle: RePEc:unm:unumer:2017021