اثرات رفاه و رشد سیاست های نوآوری در یک اقتصاد باز کوچک؛ تجزیه و تحلیل تعادل عمومی به کار رفته

We explore how innovation incentives in a small, open economy should be designed in order to achieve the highest welfare and growth. The computable general equilibrium model we develop for the purpose allows for research and development (R&D)-driven endogenous technological change embodied in varieties of capital. We study policy alternatives targeted towards R&D, capital varieties formation, and domestic investments in capital varieties. Subsidising domestic investments, thereby excluding stimuli to world market deliveries, generates less R&D, capital formation, economic growth, and welfare than do the other alternatives, reflecting that the domestic market for capital varieties is limited. In spite of breeding stronger economic growth, a higher number of patents, and a higher share of R&D in total production, direct R&D support generates slightly less welfare than subsidising formation of capital varieties. The costs in terms of welfare relates to a lower production within each variety firm, which in presence of mark-up pricing results in efficiency losses.

Promotion of productivity growth through research and development (R&D) has gained increased focus by national governments during the recent decade, as reflected in the Lisbon strategy of the EU. The main economic rationale is to increase the incentives of private firms to invest in technological improvements because of external knowledge spillovers to other firms (Romer, 1990). Some efficiency arguments counter R&D-promoting policies. There will be unnecessary social costs to the extent that R&D firms duplicate their findings or commercialise marginally better innovations that steal markets from already established R&D-based productions, as in the creative destruction model of Aghion and Howitt (1992). However, it is commonly accepted that the balance of evidence suggests too little private R&D and a case for policy intervention (Griliches, 1995, Jones and Williams, 1998 and Klette et al., 2000). The economy's size and openness are important for whether domestic R&D can be considered as the main engine for national growth, and are also decisive for the effects of different innovation incentives. In this paper we examine how innovation incentives in a small, open economy should be designed in order to enhance economic growth and welfare. In the small, open economy case a large part of the technological change relies on the external global common knowledge base (Coe and Helpman, 1995 and Keller, 2004). Also, global conditions largely determine market prices and market access for domestic firms, including the financial market conditions. We explore how these features of small, open economies affect the impacts of national innovation policies, and how the policy implications deviate from the more commonly studied closed economy case; see Russo (2004), Alvarez-Pelaez and Groth (2005), and Steger (2005).3 The case of a small, internationally exposed economy is exemplified by Norway. The productivity growth during the last ten years has been slightly above the OECD average (Statistics Norway, 2008). Coe and Helpman (1995) present data that confirm the global knowledge base as a dominant source of productivity growth in the country. The share of own R&D activity in total GDP is small, only 1.5%, with only half of this taking place in the private sector (NIFU STEP, 2007). However, these low R&D intensities compared to OECD averages are explained by a highly resource-based industry structure (Statistics Norway, 2008). As with several other European economies, Norway has a relatively ambitious goal regarding future R&D activity: a doubling of the R&D intensity (Norwegian Ministry of Science and Education, 2004) with two-thirds of this to be obtained in private industries. In 2002 a tax credit system for private R&D expenses was introduced as a means to obtain this goal (Cappelen et al., 2008). Other relevant features that are outside the focus of our study include the facts that Norway is a highly developed and prosperous economy, and has an education level well above the OECD average. In order to conclude quantitatively on the implications of innovation policies in the small open economy case, we develop a Computable General Equilibrium (CGE) model for the Norwegian economy that can account for the complex economic settings within which innovation takes place. It captures interaction among markets, industrial differences in innovation rates, and market imperfections and policy wedges that potentially interact with innovation policies. Previous applied macroeconomic models have not addressed similar cases. The pioneering CGE study by Diao et al. (1999) describes Japan as an open economy, but in several, important respects less reliant on the outside world than what is reasonable to assume for the Norwegian and similar small and open economies (see the discussion below).4 As in the closed economy studies of Romer (1990), Jones and Williams (2000) and other descendants mentioned above, we treat technological change as result of profit-maximising R&D firms' output. However, compared to previous models where economies are closed and knowledge bases national commons, our model ascribes a relatively smaller role to domestic R&D and capital formation. It does, nevertheless, account for many of the central welfare arguments for subsidising national innovation activities, such as existence of positive external knowledge spillovers from previous R&D, love of capital variety in demand, and pro-competitive increases in output that counteract the inefficiencies due to imperfect competition in the capital variety markets ( Markusen, 1981). As new patents will tend to crowd out output within each firm, the latter is an isolated argument for discouraging innovations. 5 One main divergence from the open economy model of Diao et al. (1999) is our treatment of the cross-country knowledge spillovers. In Diao et al. (1999) the impacts of international technology are channelled through the domestic R&D production. All spillovers from abroad enhance the productivity of R&D production with non-decreasing returns to scale. Own R&D, thus, plays a decisive role for economic growth. According to evidence from Norwegian firms, absorption of international spillovers through domestic R&D is far less potent (Cappelen et al., 2007). In our model, knowledge spillovers from abroad, which in the benchmark are calibrated to cause about 95% of the Norwegian technological change, are absorbed through use of all resources, where investment goods that embody technological improvements caused by R&D are only one type of carrier. This feature of our model contributes to dampen the role of R&D-stimulating policies considerably. The small, open economy focus also leads us to regard the interest rate as internationally given, in contrast to the closed capital market assumption in previous model analyses, including Diao et al. (1999). Export and import prices are, similarly, determined abroad. Capital varieties are both marketed abroad at given world market prices and sold in domestic markets characterised by monopolistic competition. Imports of other investment goods can substitute for the domestically produced capital varieties. Capital varieties are not exported in Diao et al. (1999), and the market power of each variety producer domestically is much larger than what is reasonable to assume in a small, exposed economy. As productivity externalities are related to production and use of ideas and variety capital, we analyse three comparable policy alternatives stimulating these processes; the first is a subsidy of R&D production, the second is a subsidy towards formation of variety-capital, while the third is a subsidy towards domestic investments in variety-capital. The R&D subsidy approximates the kind of R&D support already implemented in Norway, and also introduced in several other countries (Warda, 2005). The support to investments in variety-capital illustrates policies like traditional investment tax credits (Goulder and Summers, 1989 and Bovenberg and Goulder, 1993), or recent popular implementation subsidies particularly used to promote new energy and environmental technologies. The policy alternatives are all financed by higher lump sum taxes. The small, open nature of the economy implies, as expected, far smaller welfare and growth effects of innovation policies than in previous studies. The main impacts of adding small, open economy features are less influence of own R&D and less market power. In addition, increased capital supply is not reinforced by a lower interest rate, a mechanism that augments growth effects within closed economy models. On the other hand, world market exposure is the major impetus behind the positive welfare and growth effects we find. The improved competitiveness obtained within variety-capital production when subsidising R&D and capital formation, can be exploited by increasing deliveries to the export markets. Consequently, merely subsidising domestic investments induces but insignificant growth and welfare effects, as domestic demand is relatively inelastic. The positive effects on R&D and production of variety-capital are, thus, strongly dampened. As opposed to the findings of Diao et al. (1999), subsidising R&D proves slightly welfare-inferior to subsidising formation of capital varieties, in spite of generating higher growth. Again, this is a result of the open economy features. The possibility of exporting variety-capital is essential for reaping high R&D productivity gains in case of capital subsidies. This result also illustrates the more general point that promoting economic growth is not necessarily welfare improving. It will depend on to what extent the reallocations that take place compensate or reinforce the externalities and price wedges that riddle the economy. Because the number of varieties increases more in case of R&D support, more crowding-out occurs of production and profits within each variety firm. Due to monopolistic competition among the firms, these impacts dampen the productivity and welfare gains, in spite of somewhat higher knowledge spillovers and love-of-variety effects. Section 2 presents the main structure of the CGE model by means of a stylised exposition, while Section 3 describes model details and the quantification and simulation procedures. The policy effects and sensitivity tests are presented and discussed in Section 4, while Section 5 concludes.

Most previous studies conclude that current levels of R&D are inefficiently low from a macroeconomic perspective and that policy intervention is needed. However, there exist mechanisms that support the opposite conclusion, and whether and why R&D activity is suboptimal are country-specific questions that call for realistic macro-economic modelling. This study examines how innovation incentives in a small, open economy should be designed in order to enhance economic growth and welfare. In order to conclude quantitatively on the implications of innovation policies, we develop a CGE model that can account for interplays among markets and relevant endogenous and external growth mechanisms. As expected, the clearest implication of the small, open economy case is that growth and welfare effects of subsidising innovation are much smaller than in applied analyses of larger, more closed economies. Much technological development is reaped only by absorption from the global common knowledge base, and unless absorptive capacity is heavily reliant on domestic R&D or other domestic decisions, there are limits to growth and welfare impacts of domestic innovation policies. Nevertheless, we find that innovation policy matters, and in the present setting it increases growth and welfare, in accordance with most econometric evidence. The policy design is, however, crucial for the results. In our small, open economy case, we find that most of the growth and welfare effects rely on the possibility of exporting new technology, thus the most efficient policy alternatives are those succeeding in promoting such exports. However, policies should also stimulate technology deliveries at home, due to market power inefficiencies and productivity potentials of variety in the domestic markets. Our study indicates that the current policies directed towards private R&D are insufficient for reaching the proclaimed goal of the Norwegian government of an aggregate private R&D/GDP ratio of 2%. We find, not surprisingly, that the most efficient instrument for reaching this goal is to intensify direct subsidies to private R&D. According to our computations, a 50% increase in today's general R&D support increases the private R&D intensity to the desired level. However, importantly, higher R&D intensity and growth is not necessarily welfare enhancing. We find that subsidies towards capital formation generate lower R&D intensity and growth. Nevertheless they prove slightly welfare superior to a direct R&D subsidy. This is not a general result, but depends on the relative strengths of the existing inefficiencies within the economy. Sensitivity tests do, however, indicate that the result is robust within the economic setting we study. There are several potentials for adding features into the model framework that are empirically significant and relevant to small, open economies' innovation policies. First, the high reliance of small, open economies on the spillovers from the global knowledge base brings up the question on how national efforts can enhance the exploitation of this common good. Evidence indicates that investing in education, accumulating national knowledge, trading internationally, and promoting FDI, can all play roles in enhancing the capacity of the economy to take advantage of the global productivity growth.21 For less developed economies with relatively weak R&D institutions and larger gaps from their domestic knowledge levels to the global technology frontier, such strategies could prove more efficient in promoting growth. Another limitation of the present study relates to its labour supply assumptions. While expansion of the innovative industries is likely to attract mainly high-skilled labour, our model operates with one pool of homogenous labour, only; thus not grasping the full consequences of the restricted resources. Distinguishing between different skill levels would also enable us to study the interplay between innovation policies and education policies, including the absorptive capacity effects of education.