M PRA

Munich Personal RePEc Archive

The Role of Research and Development

in Economic Growth: A Review

Jangraiz Khan

Elementary and Secondary Education, Khyber Pakhtunkhwa.

30. September 2015

Online at https://mpra.ub.uni-muenchen.de/67303/
MPRA Paper No. 67303, posted 20. October 2015 04:53 UTC
 The Role of Research and Development in Economic Growth: A
Review
Jangraiz KHAN1
Abstract: This paper reviews the role of Research and Development in the economic growth. The paper links back
the story of economic growth to the studies of 17 th and 18th century. The role of Research and development was
confirmed in the models like Romer (1987), Romer (1990), Aghion and Howitt (1992), Grossman and Helpman
(1991) and Barro and Sala-i-Martin (2004). In 1990s and 2000s, the empirical investigations made it a significant
factor of economic growth. It is therefore conclude on the basis of the reviewed literature that Research and
development play a significant role in the economic growth of a country.
Key Words: Research and Development, Economic Growth, Human Capital
JEL Class: O31, O32, O47

1. Introduction
The theory of economic growth has its foundations in the seminal work of Adam Smith (1776),
David Ricardo (1817), Malthus (1798), Ramsey (1928), young (1928) and Schumpeter (1934). Later on
with the passage of time, it took new directions. The introduction of Research and Development and
imperfect competition began with the models of Romer (1987), Romer (1990), Aghion and Howitt
(1992), Grossman and Helpman (1991) and other similar works (Barro and Sala-i-Martin, 2004). In 1992,
Aghion and Howitti developed a model of endogenous growth by including the role of R&D in economic
growth. This model used the idea of creative destruction. It assumes that the individual research can also
affect the whole economy. The model derived equilibrium through forward-looking difference equation.
It means that the pace of research in a period depends on present research and on the productivity of
research. The research firms get monopoly rent of their innovations, which are replaced by future
innovations. Each innovation result in a new intermediate good, which is then used to produce final good
more efficiently. This study analyzed the positive and static properties of stationary equilibrium with
R&D. Economic growth is the result of innovations, skilled Labour force and productivity of research.
According to Engelbrecht (1997) human capital enters into production not only as a factor of
production but also as the endogenous theories predicted. Therefore, human capital and R&D has diverse
role in domestic innovation and international spillover of knowledge. This spillover leads to economic
growth. Fagerberg, Verspagen and Caniee (1997) used simultaneous equation model to find the
interrelationship between GDP per capita growth, employment growth and innovation with technology
diffusion in various regions of Europe during the period 1983-89. GDP per capita and unemployment
proved to be inversely related as poor regions faced higher level of unemployment rates. The net inward
migration showed positive relationship with GDP per capita growth. The backward regions have very
little emphasis on R& D and raise in R&D expenditure is very crucial for growth of poor European
regions. It will accelerate growth of these regions without effecting growth of any other region. The R&D
expenditures growth should be supported by high quality of institutions
Borensztein, Gregorio and Lee (1998) analyzed empirically the role of Foreign Direct
Investment (FDI) in technological diffusion and economic growth by developing a model of endogenous
growth. The data was taken for 69 developing countries from Barro and Lee (1994), International
Monetary Fund (IMF) and Organization for Economic Co-operation (OECD) publications for the period
1970-89. The study investigated the channels through which the FDI inflow from industrialized countries
can affect economic growth. The study concluded that FDI is more productive in those countries where
the human capital accumulation is comparatively low. This shows the affect of FDI on economic growth
through the improved human capital and technology diffusion. The education and FDI are strongly and

1
Elementary and Secondary Education Department, Khyber Pakhtunkhwa, Pakistan.
positively related. The aim of this paper is review the theoretical and empirical literature to find the role
of R&D in economic growth.

2. The Research and development and Economic growth Literature

According to Blackburn, Huang and Pozzolo (2000), R&D leads to inventions and innovation,
this improves the quality of manufacturing and updating of existing technologies. The model used the
ideas of the models developed by Lucas (1988), Uzawa (1965), Grossmann and Helpmann (1989), and
Romer (1990).The model recommends accumulation of skills and knowledge for people in an economy in
order to get economic growth. Human capital accumulation not only accelerates economic growth but
also provides incentives for research and innovations. It improves the quality of manufacturing.
Frantzen (2000) supports the view that both R&D and human capital play a significant role in
Total Factor Productivity. Both domestic and foreign R&D show a significant impact on TFP but the
impact of domestic R&D played more significant role in growth in richer countries as compared to
smaller economies.
Ballot, Fakhfakh and Taymaz (2001) studied the effects of human and technological capital on
productivity of firms in France and Sweden economies by using Generalized Method of Moments
(GMM). Panel data for the period 1987-1993 was used which was taken from large Swedish and French
firms. The study used R&D and Human capital stock as inputs in the model. Technological capital was
measured by R&D and human capital by firms sponsored training. The results show significant role of
human and technological capital in determination of firm’s productivity in Sweden and France. The
interaction effects between R&D and human capital stock were not found robust. The study suggested the
importance of training as input for France. R&D showed more significant result in Sweden as compared
to France. The rate of return for R&D was found 38% for France and 32% for Sweden which within the
range as in industrial countries. Zeng (2001) developed a multi-sector dynamic general equilibrium
growth model to view the role of innovation and imitation in economic growth. This model assumed
investment in innovation and imitation endogenous. This model considers innovation and imitation in
same sector at same time. Changes in these variables occur in natural way. This model shows that subsidy
to innovation will push economic growth and subsidy to imitation will move it in opposite direction. The
welfare consequences of innovation and imitation are not sure.
Chou (2002) examined the contribution of research and development, and human capital in
Australian economy using country-level data during the period 1960-2000. This model shows that long
run steady state growth is the result of local as well as global research and development of new ideas. The
growth accounting method was used for the analysis. The study concluded that the growth of Australian
per capita income is not totally due to factor accumulation but also due to enhancing efficiency of
transformation of inputs into outputs. 28 % of growth was due to educational attainment and 27-57 % due
to research intensity in Australia as well as in G-% countries. Australian economy is expected to continue
its growth and the R&D will continue its role in economic growth of Australia.
Jones (2002) introduced world of ideas in his growth model. This model states that the economic
growth of an economy in long run depends on globally developed ideas. The hoard of ideas in long run is
directly proportional to the worldwide research and the population of that economy. The model was
applied to United States economy. The US economic growth per capita remained almost constant in last
century but stock of human capital increased to great extent. The sources of economic growth in US
include education, R&D, world population growth and other factors. The education, health and related
factors explain about 80% of US economic growth while 20% of growth is result of world population
expansion. In future the contribution of research (Ideas) will continue for sometime and market for ideas
will expand. The world population will resultantly become sufficiently skilled.
Lee (2005) assessed Korean economy by using methods of growth accounting and level
accounting. The results show that output per worker gap between Korea and United States has been fallen
during past three decades. The study finds Korea on path of sustained growth due to increasing stock of
human as well as physical capital. The manufacturing industries got good pace but the performance of the
service industry is not up to the mark. The study suggested Korean economy to increase R&D
expenditure for innovation in technology and improve quality of education so that desired level of growth
may be achieved. For educational quality, improvement is needed in educational institutions and their
management. Liberalization of educational institutions and inter school competitions can be helpful in
achievement of desired goals.
Kwack and Yang (2006) analyzed Korean growth experience from neoclassical growth
perspective. Annual data for the period 1971-2002 was used for this purpose. Investment rate, R&D,
Education and size of government emerged as major determinants of longrun economic growth in Korea.
The Study provided evidence for endogenous growth theory. The study showed that public and
household’s expenditure on education and R&D investment are major contributors to innovation and
improving quality of labour. Higher dependency ratio of youngs and older people adversely affected
Korean growth rate. Improvement of political, cultural and social institutions was recommended to
achieve longrun sustained economic growth rate.
Ornaghi (2006) analyzed the role of knowledge spillovers in the productivity and demand of
firms. The model modified the Griliches (1979) approach by introducing demand equation in production
function. The model concludes that knowledge spillovers improve the quality of product produced by
firms and it adds to the productivity of firm. The study finds difference technology innovation and
process innovation. The former’s effect was found greater than the latter one. The model gives
justification to subsidies to R&D small and medium projects as adopted by several industrialized
countries.
Grossman (2007) developed a model to find the contribution of R&D subsidies and publicly
provided science education to economic growth. The study concluded that R&D subsidies may not
contribute economic growth and public welfare and the intertemporal knowledge spillovers are the
externalities of Firms expenditure on R&D. The subsidies to R&D increase income inequality. The model
confirmed that publicly provided education aiming at higher skills in science and technology will
contribute positively to economic growth of a country. As public education contributes to economic
growth more efficiently than R&D subsidies, therefore, it was suggested to develop R&D through
promotion public education of scientists and other skilled persons.
Afza and Nazir (2007) worked on the role of human resource management in economic
competitiveness in South Asian economies with special reference to Pakistan. It was observed that
Pakistan did not avail the golden opportunities created by globalized world. Weak skill base is one of the
major factors keeping Pakistan away of taking advantages from global markets. The study suggested
improvement in skill base, expansion of education and training, and development of R&D for better
economic consequences. Basic education is key to for human resource development in Pakistan. It was
also suggested to accelerate the manpower export to reduce poverty and improve macroeconomic
indicators. Similarly, integration of available physical and human capital and joint technological ventures
can reduce the regional economic disparities to a great extent.
Falk (2007) developed a dynamic empirical model to know significance of R&D investment in
long run economic growth of OECD countries using panel data set. The study provided a new evidence
for R&D-economic growth relationship. The results were derived through GMM (generalized method of
moments).The study investigated whether higher R&D investment push economic growth keeping
investment ratio, industrial R&D intensity and human capital constant. Five yearly and ten yearly
averages were used. Higher R&D investment was found positively related to GDP growth in working age
populations. The results were robust in both 5-year and 10-year cases.
Goel, Payne, and Ram (2008) premeditated the trends in various components of R&D and its
contribution to economic growth in USA by using disaggregated data of half century. Surprisingly, USA
experienced decline in defense R&D outlays and federal R&D expenditure. The non-federal R&D
funding expanded sharply during the period. Interestingly, the estimation showed strong association of
economic growth to federal R&D expenditure rather than non-federal R&D outlays. The economic
growth posed strong relationship to defense R&D instead of non-federal R&D. The study proposed
substantial push up in defense R&D and non-federal R&D in USA for sustainable economic growth.
Kuo and Yang (2008) examined the effects of knowledge capital and technology spillover on
regional economic growth in China. The results showed that R&D, capital and technology import
contribute significantly to economic growth in China. The elasticity of R&D to economic growth was as
large as of technology showing same contribution to economic growth of China. The study suggests the
existence of R&D spillover as well as international knowledge spillovers. Tax incentives, financial
assistance and R&D grants can be helpful tools to encourage research activities and innovation in
economy. Similarly policies which encourage investment in education and job training were were
recommended for China.
Sterlacchini (2008) conducted a study to find out the association of regional disparities in R&D
and higher education with regional economic growth. The data was taken from197 regions of 12
European countries for the period 1995-2002.The empirical evidence supported positive and significant
impact of knowledge, educational attainment and intensity of R&D expenditure on economic growth of
European regions. The results showed that equal growth opportunities in EU regions may not be achieved
by only gearing investment in public and private education. R&D expenditures were found significant
only in most developed regions of EU. Therefore to reap the benefits of innovation and knowledge, public
support for higher education and R&D can be effective tool. The study concluded that weak relationship
between public universities and business firms may be one of the most important reasons keeping
European Union (EU) regions away from reaping the fruits of R&D and higher education.
Jin (2009) analyzed the causal relationship between rising research productivity and economic
growth in five Asian countries by using Granger causality framework. The relationship was found
bidirectional in Hong Kong. Hong Kong is small open economy offering numerous kinds of services and
tertiary education may have direct and immediate effect on services in management and other sectors. In
Japan, the relationship was unidirectional as from economic growth to Research and productivity. In
Korea and Taiwan, research productivity caused economic growth during the study period. Singapore
with a small number of higher education institutions has limited number of publications and that the
reason that research-economic growth relationship is not significant. Khan and Khattak (2013) suggested
the development of R&D in Pakistan for sustained economic growth.
3. Conclusion
The review of theoretical and empirical studies relevant to the role of R & D in economic growth of
countries around the world agree on the significant role of different form R&D in productivity or
economic growth. Therefore, it can be conclude that the developing countries should concentrate on R&D
to achieve the sustained economic growth.

References
Afza, T. & Nazir. M.S. 2007. Economic Competitiveness and Human Resource Development: An FDI
Perspective. Political Economy and Social Review, 45 (2), 167-180. http://www.jstor.org/stable/25825313
Aghion, P. & Peter.H. 1992. A Model of Growth Through Creative Destruction. Econometrica, 60 (2),
323-351, http://www.jstor.org/stable/2951599
Ballot, G., F. Fakhfakh, F. & Taymaz,E. 2001. Firms’ Human Capital, R&D and Performance: A Study on
French and Swedish Firms. Labour Economics, 8, 443–462. http://dx.doi.org/10.1016/S0927-
5371(01)00038-0
Barro, R.J., & Martin. X.S. 2004. Economic Growth. Massachusetts Institute of Technology press, 2nd Edition.
http://down.cenet.org.cn/upfile/8/200751171644184.pdf
Blackburn, K., Hung. V. T. Y & Pozzolo. A. F. 2000. Research, Development and Human Capital
Accumulation. Journal of Monetary Economics, 22, 189-206. http://dx.doi.org/10.1016/S0164-
0704(00)00128-2
Borensztein E, Gregorio, J. D., & Lee, J-W. 1998. How Does Foreign Direct Investment Affect Economic
Growth. Journal of International Economics, 45, 115–135, DOI. 10.3386/w5057
Chou, Y. K. 2002. The Australian Growth Experience (1960-2000), R & D based, Human Capital-Based or Just
Steady State Growth? Research Paper No. 855, ISSN 0819-2642, Department of Economics, University
of Melbourne. http://econpapers.repec.org/RePEc:mlb:wpaper:855
Engelbrecht, H.J. 1997. International R &D spillovers, human capital and productivity in OECD economies: An
empirical investigation, European Economic Review, 41,1479-1488. http://dx.doi.org/10.1016/S0014-
2921(96)00046-3
Fagerberg, J., Verspagen, B. & Caniee.M. 1997. Technology, Growth and Unemployment across European
Regions, Regional Studies, 31 (5), 457-466. http://core.ac.uk/download/pdf/6787087.pdf
Falk, M. 2007. R & D spending in the high-tech sector and economic growth. Research in Economics, Vol. 61,
pp. 140–147. http://dx.doi.org/10.1016/j.rie.2007.05.002
Frantzen, D. 2000. R&D. Human Capital and International Technology Spillovers: A Cross-Country Analysis.
The Scandinavian Journal of Economics, 102( 1), 57-75. DOI: 10.1111/1467-9442.00184
Goel, R. K., Payne J. E., & Ram.. 2008. R&D expenditures and U.S. economic growth:A disaggregated approach.
Journal of Policy Modeling, 30, 237–250. http://dx.doi.org/10.1016/j.jpolmod.2007.04.008
Grilliches, Z. 1979. Issues in Assessing the Contribution of Research and Development to Productivity Growth.
The Bell Journal of Economics, 10 (1), 92-116. http://www.jstor.org/stable/3003321
Grossman, G.M., & Helpman.E. 1989. Quality Ladders in the Theory of Growth. NBER Working Paper No.
3099 . http://www.nber.org/papers/w3099
Grossman, G. M., & Helpman.E. 1991. Trade, knowledge spillovers, and growth. European Economic Review,
35 ( 2-3), 517-526. http://dx.doi.org/10.1016/0014-2921(91)90153-A
Grossmann,V. 2007. How to promote R&D-based growth? Public education expenditure on scientists and
engineers versus R&D subsidies. Journal of Macroeconomics, 29, 891–911.
http://dx.doi.org/10.1016/j.jmacro.2006.01.001
Jin, J. C., 2009. Economic research and economic growth: Evidence from East Asian economies, Journal of Asian
Economics, 20, 150–155. http://dx.doi.org/10.1016/j.asieco.2008.12.002
Jones C.I . 2002. Sources of U. S. Economic Growth in a World of Ideas. The American Economic Review, 92 (1),
220-239. DOI: 10.1257/000282802760015685
Khan, J., and Khattak, N. U. R. 2013. The Significance of Research and Development for Economic Growth: The
Case of Pakistan, City University Research Journal, pp.175-86.
http://www.cityuniversity.edu.pk/curj/Journals/Journal/July%202013/Article%203.pdf

Kuo,C.C & Yang. C.H. 2008. Knowledge capital and spillover on regional economic growth: Evidence from
China, China Economic Review, 19,594–604. http://dx.doi.org/10.1016/j.chieco.2008.06.004
Kwack, S. U & Lee. Y. S . 2006. Analyzing the Korea’s Growth Experience: The application of R&D and Human
 Capital Based Growth Models with Demography, Journal of Asian Economics, 17, 818–831.
http://dx.doi.org/10.1016/j.asieco.2006.08.002
Lee, J. W. 2005. Human Capital and Productivity for Korea’s Sustained Economic Growth, Journal of Asian
Economics, 16, 663–687. http://dx.doi.org/10.1016/j.asieco.2005.06.009
Lucas, R., Jr. 1988. On the Mechanics of Economic Erowth, Journal of Monetary Economics, 22, 3-22, North
Holland.http://www.parisschoolofeconomics.eu/docs/darcillon-hibault/lucasmechanicseconomicgrowth.pdf
Malthus, T. R. 1798. An Essay on the Principle of Population. London: W. Pickering, 1986.
http://www.econlib.org/library/Malthus/malPop.html
Ornaghi,C. 2006.Spillovers in product and process innovation: Evidence from Manufacturing
Firms.,International Journal of Industrial Organization, 24, 349– 380.
http://dx.doi.org/10.1016/j.ijindorg.2005.07.002
Ramsey, F. 1928. A Mathematical Theory of Saving. Economic Journal, 38, 543–559.
http://folk.uio.no/gasheim/zRam1928.pdf
Ricardo, D. 1817. On the Principles of Political Economy and Taxation. Cambridge: Cambridge University
Press, 1951.
Romer, P. M. 1987. Growth Based on Increasing Returns Due to Specialization. American Economic Review, 77,
56–62. http://www.development.wne.uw.edu.pl/uploads/Courses/gtac_romer_87.pdf
Romer. P. M. 1990. Endogenous Technological change .The Journal of Political Economy, 98 ( 5), S71-S102. The
University of Chicago Press.
Schumpeter, J. A. 1934. The Theory of Economic Development. Cambridge, MA: Harvard University Press.
Smith, A., 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. New York: Random House,
1937.
Sterlacchini., A. 2008. R&D, higher education and regional growth: Uneven linkages among European regions,
Research Policy, 37, 1096–1107. http://dx.doi.org/10.1016/j.respol.2008.04.009
Uzawa, H. 1965. Optimum Technical Change in Aggregative Model of Economic Growth, International Economic
Review, 6 (1), 18-31. http://kisi.deu.edu.tr/yesim.kustepeli/uzawa1965.pdf
Young, A. 1928. Increasing Returns and Economic Progress. Economic Journal, 38, 527–542.
http://cas.umkc.edu/econ/economics/faculty/Forstater/506/506readings/increasing%20returns%20and%20e
conomic%20progress.pdf
Zeng , J., 2001 . Innovative vs. imitative R&D and economic Growth., Journal of Development Economics, 64,
499–528. http://dx.doi.org/10.1016/S0304-3878(00)00148-6

i
Aghion and Howitt (1992)