1 R&D in the European Strategy: the case of the 3% effort of BARCELONA CESAER POLITECNICO DI MILANO Milano Nov 2008

2 R&D in the European Strategy: the case of the 3% effort of BARCELONA I. Methodological and Theoretical Aspects II. Results of the reference scenario V0 III. Other Results IV. Conclusions

3 I. Methodological and Theoretical Aspects I.1 What can we learn from new growth theories ? I.2 The Technical Progress in NEMESIS I.3 Overview of the different exercises

4 I.1 What can we learn from the new growth theories? 1/2 We can act on long term growth R&D Policies are important Precise description of endogenous technical progress

5 I.1 What can we learn from the new growth theories? 2/2 Possibilities of non decreasing returns Knowledge externalities – Social returns of research are greater than private returns – Spontaneous research level is insufficient

6 I.1 New growth theories in applied modelling Two types of innovations – Process – Product (quality) Endogenous technical progress – Learning – R&D Knowledge externalities (Knowledge Spillovers) – Inter-sectoral – Inter-national

7 I.2 The technical progress in NEMESIS 1/9 From R&D to knowledge stock From knowledge to innovations From innovation to economic performances

8 I.2 The technical progress in NEMESIS 2/9 From R&D to Knowledge stock

9 I.2 The technical progress in NEMESIS 3/9 From knowledge to innovation

10 I.2 The technical progress in NEMESIS 4/9 From innovations to economic performances Process innovation:

11 I.2 The technical progress in NEMESIS 5/9 From innovations to economic performances Process innovation : – Increase of the demand greater than the supply increase if ε>1 – But in time series ε<1 → Thus, absorption following a productivity shock is not sufficient for maintaining factors use

12 I.2 The technical progress in NEMESIS 6/9 From innovations to economic performances Product Innovation:

13 I.2 The technical progress in NEMESIS 7/9 From innovations to economic performances Product innovations: – For a production increase, the increase of the demand for the new efficiency must be greater than the increase of efficiency due to the innovation, that is generally the case. – Moreover, product innovations makes more than compensate the decrease of factor employment due to process innovations

14 I.2 The technical progress in NEMESIS 8/9 Technical progress equations Process innovations Quality (product) innovations

15 I.2 The technical progress in NEMESIS 9/9 Technical progress equations Economic performance Production increase Demand increase due to process innovations Demand increase due to quality innovations

16 I.2 Estimations of the elasticity of 1/2 Production with respect to R&D and KNOW Econometric studies – α similar role than β

17 I.2 Estimations of the elasticity of 2/2 Production with respect to R&D and KNOW Value of α in the literature (Mohnen [90], Griliches [92], Nadiri [93], Cameron [98], Guellec et [92] van Pottelsberghe de La Potterie [2001], Bagnoli [2001]) – Between 0.05 et 0.20

18 I.3 R&D and knowledge productivity in NEMESIS First assumption : R&D elasticity vary with the technological advancement of the sector: it is strongest in R&D intensive sectors and thus strongest in R&D intensive countries Other assumptions: R&D elasticity is identical in all sectors and countries: – β=0.1 – β=0.2

19 I.3 An important mechanism Sharing of productivity gains – 0% of productivity gains goes to wages – 33% of productivity gains goes to wages – 100% of productivity gains goes to wages

20 I.3 Implementation of R&D policies Public or private financing Public procurements Private research vs 1/3-2/3 Absolute or relative convergence of countries

21 I.3 Summary of realised simulations

22 II. Results of the reference scenario V00 II.1 Macro-economic results for Europe II.2 Sectoral results for Europe II.3 Results for one country (France)

23 II.1 Macro-economic results for Europe

24 II.1 Macro-economic results for Europe

25 II.1 Macro-economic results for Europe

26 II.2 Sectoral results for Europe

27 II.2 Sectoral results for Europe

28 II.2 Sectoral results for Europe

29 II.2 Sectoral results for Europe

30 II.2 Sectoral results for Europe

31 II.2 Sectoral results for Europe

32 II.2 Sectoral results for Europe

33 II.3 Macro-economic results for France

34 II.3 Sectoral results for France

35 II.3 Sectoral results for France

36 II.3 Sectoral results for France

37 II.3 Sectoral results for France

38 II.3 Sectoral results for France

39 III Other results

40 III Other results

41 III Other results

42 III Other results

43 III Other results

44 IV. Conclusions Exercise limited by some assumptions – No finance integration – Deterministic mechanisms – No reactions of other countries Mecanisms and policy implementation scenarii give by comparison teachings allowing to ask new questions

45 IV. Global results Two distinct phases: – Maturation Expenditure multiplier Deepening of deficits – Deployment of innovation effects Durable Growth – Competitiveness – Internal demand – The succession of the two phases limit the deficits

46 IV. Global results GDP deviation from 10.9 % to 22.5%, in mean 15% Growth Surplus of 0.5% per year Potential growth Surplus from 20 to 25% in a context of labour force scarcity

47 IV. Global results Employment increases of 10 Millions in mean Research employment increases of 3,3 millions with respect to the baseline in 2030 Research employment increases of 4,5 millions between 2003 and 2030

48 IV. Global results Expenditure multiplier (ex-ante) very high 6-8 – Status of R&D expenditures with respect to the stability pact Modification of relatives performances of the different European Countries

49 IV. Specific results Scenarii with a financing by the deficits are better, but limited interpretation of the results – No feedback of deficits on GDP

50 IV. Specific results Better performances for Europe in the case of absolute convergence Less employment when R&D is totally realised in the private sector

51 IV. Specific results Better results (GDP, employment) when productivity gains are kept by firms – Competitiveness – Substitution effect favorable to labour

52 IV. Sectoral Results Contrasted results – Equipment goods and chemicals very advantaged (intensive R&D, Exports) – Consumption goods pulled up by internal demand – Intermediary goods suffer of productivity gains

53 IV. Sectoral Results Importance of public procurements – Initial increase of deficits (public, external) – But Growth, employment et high multipliers: Relance effect Concentration of R&D effort on high technological sectors

54 IV. Sectoral Results Better results if R&D effort is concentrated on high technological sectors: – Better R&D productivity – High externality transmitters Of knowledge (Knowledge spillovers) Of surplus transfers (Rent Spillovers) – Less productivity growth for high labor intensive sector: strong employment growth