Optimal R&D intensity and dynamic efficiency in Korea

Abstract

Summary In Korea, not only has spending on research been growing in real terms, but its relative importance compared to other economic activities has been steadily increasing as well. In this paper, we introduce the socially optimal share of research and development (R&D) in the economic growth model. We consider both the laissez‐faire (market equilibrium) steady‐state growth rate and the social optimum. Because individuals and individual firms do not internalize the effect of individual knowledge accumulation when optimizing on consumption and capital accumulation, the equilibrium growth rate may be less than the socially optimal rate of growth. With the developed model (Jones and Williams, 2000), we find that the decentralized economy typically underinvests in R&D relative to what is socially optimum. We also examine how far the steady‐state growth rate deviates from the social optimum in the Korean economy. Here, we focus on the positive external effects of R&D. According to ordinary least squares (LS) analysis, the estimate of λ (the elasticity of knowledge production to R&D personnel) is 0.1559. Thus, we can see that the optimal R&D share in Korea is 3.32%. This implies that the ratio of optimal share to market share of R&D in Korea is 1.8. According to Johansen's (1991) cointegration analysis, the p‐value for the test where λ=0.2 is 0.24, and so the restrictions are supported by the data. In addition, we tested the hypothesis that lambda is 0, 0.1, 0.2, 0.3…, respectively. From the results, we can conclude that the lower bound for lambda is 0.2. This implies that the lower bound for the optimal share of R&D in Korea is 3.74%. In summary, from all cases of the form for the knowledge production function, we could determine that both the intertemporal‐spillover and appropriability effects in the Korean economy tend to make the average growth rate less than optimal. Because the business‐stealing effect tends to make it greater than optimal conflicts and is dominated by the former two effects, the laissez‐faire average growth rate in Korea may be less than optimal.