In order to define optimal investment in R&D, it is necessary to study the rate of return to R&D investments. Jones and Williams in the 1998 paper “Measuring the Social Rate of Return to R&D” estimate the effects of non-optimal investment using an endogenous growth model. This paper will use a similar growth model to conduct its research, with the goal of estimating the social rate of return instead of the private rate of return. The reason for this distinction being the social rate of return includes positive spillovers, as mentioned previously.
As discussed in Corderi and Lin’s paper, many studies have attempted “to estimate the social rate of return accounting for different types of spillover.” There are three differing approaches making use of these spillovers. The first, exemplified by the work of Sveikauskas (1981), and Griliches and Lichtenberg (1984), regress the variable total factor productivity (TFP), which accounts for the effects of total output not caused by the traditional inputs of capital and labor. TFP will be regressed on “lagged R&D intensity which is measured as the ratio of privately financed R&D spending to sales.”
The second strategy of estimation is the incorporation of inter-industry spillovers. This is essentially using the effect of R&D in one industry and comparing it to measured productivity in other industries. Terleckyj (1980), Scherer (1982), Griliches and Lichtenberg (1984a) and Jaffe (1996) are all authors who realized and used this methodology.
The third approach makes use of international spillovers, which attempt to “capture the effect that foreign R&D has in domestic productivity through trade.” This is a sort of foreign non-direct investment. Authors that have followed this approach include Coe and Helpman (1995) and Nadiri and Kim (1996).
This paper’s approach will take an identical pattern of estimation for the social rate of return to R&D to that of Corderi and Lin (2005). As mentioned previously the focus will center on the coal petroleum and nuclear energy industry for multiple countries in The Organisation for Economic Cooperation and Development (OECD) database. The OECD is an organization whose objective is to promote policies to improve the social and economic well being of people around the world using analyses and recommendations that are independent and evidence based. Part of the hypothesis is the understanding of the existence of intra-industry spillovers and the significance of social rates of return in relation.
The methodology for this paper will follow a framework developed by the work of Jones and Williams (1998) and then later used and updated by Corderi and Lin (2005).
If our goal were to use data on the productivity of R&D investment used to estimate social return to R&D then a tested and useful approach would be to treat R&D investment simply as an alternative to capital investment in the model. We will use a Cobb-Douglas...