Abstract
We analyze the dynamic interaction of Japan’s total factor productivity, gross domestic product (GDP) domestic and foreign private and public research and development (R&D) in vector-error-correction models (VECMs) for Japan with data from 1963–2017. Extensive testing leads to favoring a model with five cointegrating equations for the six variables. Analysis of effects of permanent policy changes shows that (i) additional public R&D encourages private R&D and total factor productivity (TFP), and has higher internal rates of return than private R&D changes and therefore could speed up Japan’s growth; (ii) public R&D changes have a statistically significant positive permanent effect on foreign private R&D stocks and a transitional effect on foreign public R&D stocks; (iii) private R&D changes have a statistically significant positive permanent effect on foreign public R&D stocks and a transitional effect on foreign private R&D stocks; (iv) after a temporary GDP change, public R&D is counter-cyclical in the short and medium run and private R&D is pro-cyclical. Empirical results are related to the parameters of a VES (variable elasticity of substitution) function for TFP production.
Highlights
Since 1992, Japan’s growth rate of gross domestic product (GDP) or GNI per capita has been lower than those of other high-income countries, OECD (Organization for Economic Cooperation and Development) members, members of the EURO area, or the USA1
Since 1992, Japan’s growth rate of GDP or GNI per capita has been lower than those of other high-income countries, OECD (Organization for Economic Cooperation and Development) members, members of the EURO area, or the USA1. As this is a long period of almost thirty years, policies should address total factor productivity (TFP) and the factors driving it, research and development (R&D)
Under the opposite assumption of equal marginal products of private and public R&D in TFP production, it is possible to obtain the parameters of a VES production function from the vector-error-correction models (VECMs) estimates (see Section 5.4 “VES parameters from role for private and public R&D in Japan and it is plausible that aggregating foreign private and public R&D yields unclear results in Luintel and Khan (2004)
Summary
Since 1992, Japan’s growth rate of GDP or GNI (gross national income) per capita has been lower than those of other high-income countries, OECD (Organization for Economic Cooperation and Development) members, members of the EURO area, or the USA1. As this is a long period of almost thirty years, policies should address total factor productivity (TFP) and the factors driving it, R&D and human capital. Dynamic analyzes of the effect of R&D on TFP have considered domestic private and public (non-business) and foreign total R&D stocks (Eaton and Kortum 1997; Luintel and Khan 2004). The domestic public R&D stock is an important policy variable for the role of governments in stimulating the growth process
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