Spa4 Final Report Final

A Time Series Analysis of the Development in National R&D
Intensities and National Public Expenditures on R&D
In relation to (PP-CT-M2-2005-0001):
Framework Service Contract for Expert Support with the Production and
Analysis of R&D Policy Indicators
Final Study Report for Specific Assignment 4 (SPA4):
Literature Review, Feasibility Study, Collection of Field Statistics,

Calculation of Indicators, Survey, Conclusions
Developed by:
IDEA CONSULT (Coordinator)
FRAUNHOFER-ISI, NIFU STEP, ZEW
Contact persons:
Arnold Verbeek (IDEA Consult) Elissavet Lykogianni (IDEA Consult)
Overall Coordinator Assignment Manager
Brussels, December 2008
1
Analysis of the Development in National R&D Intensities and National Public Expenditures on R&D
TABLE OF CONTENTS
EXECUTIVE SUMMARY ................................................................................ 5
Part 1: Policy relevant considerations and findings .......................... 7
1 Introduction ......................................................................................... 8
1.1 R&D intensities as indicators of progress......................................8
1.2 The analytical framework ...........................................................9
2 Co-evolution of R&D expenditures and GDP growth over time............ 13
3 Publicly funded R&D and its influence on the research base............... 17
4 Country specific findings .................................................................... 18

4.1 Introduction ...........................................................................18
4.2 France ...................................................................................19
4.3 Germany ...............................................................................20
4.4 United Kingdom ......................................................................21
4.5 Spain ....................................................................................22
4.6 Austria ..................................................................................23
4.7 Italy ......................................................................................24
4.8 The Netherlands .....................................................................25
4.9 Greece ..................................................................................26
4.10 Denmark ...............................................................................27
4.11 Finland ..................................................................................28
4.12 Slovenia ................................................................................29
4.13 Latvia ....................................................................................30
4.14 United States .........................................................................31
4.15 Japan ....................................................................................32
5 Policy relevant findings ...................................................................... 34
Part 2: Technical background ......................................................... 37
1 Literature Review ............................................................................... 38

1.1 R&D expenditures and economic growth ....................................38
1.1.1 Growth theory: an introduction ........................................................................ 38
1.1.2 Endogenous growth: the effect of R&D and spillovers.......................................... 39
1.1.3 The determinants of R&D................................................................................. 40

1.2 The effects of Public R&D expenditures ......................................43
1.2.1 Rationale for Public R&D .................................................................................. 43
1.2.2 Effects of Public R&D....................................................................................... 44
2 Feasibility study ................................................................................. 48
2
2.1 The conceptual framework .......................................................48

2.2 Collection of Indicators ............................................................49
2.3 Data analysis strategy .............................................................50
2.3.1 Data sources used .......................................................................................... 50
2.3.2 Data coverage and analysis ............................................................................. 50
2.4 Expert involvement and validation ............................................51
3 The co-evolution of GDP and R&D....................................................... 53

3.1 Descriptive Statistics ...............................................................53
3.1.1 R&D intensity in the EU ................................................................................... 53
3.1.2 Co-evolution of GDP and GERD: Changes in GERD and GDP................................. 55
3.1.3 Beyond the Co-evolution of GDP and GERD........................................................ 59
3.2 Empirical analysis ...................................................................64

3.2.1 Co-evolution of GDP and R&D: a test ................................................................ 64
3.2.2 Granger Causality and Co-integration tests by country ........................................ 65
3.2.3 Regression analysis......................................................................................... 70
4 Public R&D and the research base ...................................................... 72

4.1 Government funding of R&D.....................................................72
4.2 Regression analysis .................................................................73
4.2.1 Public R&D and the output of research .............................................................. 73
4.2.2 Public R&D and research input.......................................................................... 74
References and bibliography .................................................................... 76
Annex 1: List of indicators collected .................................................. 80
Annex 2: Additional Statistics ............................................................ 86
Annex 3: Additional graphs based on the data collected.................... 89
3
Acknowledgements
This report was prepared by Elissavet Lykogianni (Assignment manager and lead
researcher), and Arnold Verbeek (Overall coordinator and supporting expert).
We would like to acknowledge the insightful comments and suggestions of Professor

Georg Licht (ZEW, Germany) throughout the various phases of this study. We also
acknowledge the valuable contributions of Thomas Stahlecker (Fraunhofer ISI,
Germany) during the data collection phase and Mark Knell (NIFU STEP, Norway)
during the literature-review phase.
Finally, we have very much appreciated the valuable comments of the experts that
were consulted during the validation phase of the study, being:
Dominique Guellec (OECD)
Hugo Erken (Ministry of Economic Affairs in The Netherlands)
Nick Von Tunzelmann (SPRU, University of Sussex, UK)
Piet Donselaar (Ministry of Economic Affairs in The Netherlands)
Philip Shapira (University of Manchester and Georgia Institute of Technology

in the US)
Evanthia Schmidt (Aarhus University, Denmark)
Gonzalo Len (Polytechnic University of Madrid, Spain)
Antoine Schoen (ESIEE Engineering, France)
Andreas Reinstaller (WIFO, Austria)
Kai Husso (Ministry of Employment and the Economy, Finland)
Maja Bucar (University of Ljubljana, Slovenia)
4
EXECUTIVE SUMMARY
The contribution of this small-scale study is twofold: first of all, the relationship
GDP and R&D over time are investigated; secondly, the relationship between public
R&D and the research potential of a country is analysed. The focus of the study lies
on the analysis of quantitative patterns and developments rather than the more
qualitative explanation of these patterns. The main findings of this study can be
summarised as follows:
As intuitively expected, levels of R&D spending are interrelated to the levels

of economic growth; growing R&D expenditure levels might not always be
completely reflected in the R&D investment intensities.
The evidence shows that R&D intensities are temporarily influenced by the
levels of GDP growth, which is expectable as GDP is the denominator in the
calculation of the R&D intensities. In other words, high levels of GDP
(growth) in a certain time frame may very well push the R&D intensity
downwards. The opposite is valid as well: in periods of declining GDP growth
R&D intensities may move upwards for a certain period of time. This brings
us to our following policy message.
A longitudinal approach seems more suitable for monitoring progress in R&D

and innovation expenditures: in view of temporal fluctuations of R&D
intensity due to short-term GDP developments, R&D intensity should be
used to monitor R&D expenditure levels over a longer period of time. For
monitoring in the short term, it would be appropriate to develop indicators
at a lower level.
The development patterns of GDP and R&D differ strongly among countries.
The study provides several indications that R&D expenditures lag GDP
growth. In some countries the lag occurs already after 1 year while in others
it only occurs after 3-5 years. A possible explanation is that it takes some
time before R&D expenditures have an impact on GDP (this is also what the
co-integration test shows). Moreover, it seems that in general private R&D
expenditures seem to have shorter lag intervals with GDP than public
expenditures, which suggests a closer interrelation with GDP growth than
public expenditures on R&D.
The evolution of GDP versus R&D expenditures and R&D personnel depends
on several structural characteristics like governance structure, policy
priorities, and systemic features like industry and academic structures.
Understanding R&D expenditure patterns and performance, requires in
depth knowledge of this characteristics. A one size fits all approach seems
too simplistic.
5
The effect of government-performed R&D is significant and positive on the

number of publications and patent applications (the output side). Public R&D
expenditures are positively correlated with the overall research base
measured by the number of R&D personnel as well as the scientific output in
terms of publications and patents of a country, but with a time lag of 1-2
years. R&D performed by the business sector positively influences the
number of patent applications, which could be expected, as the proximity to
patent in the business sector is in general higher than for the public sector.
6
Part 1: POLICY RELEVANT CONSIDERATIONS AND

FINDINGS
7
1 Introduction
1.1 R&D intensities as indicators of progress

In the context of the Lisbon Agenda and the 3% R&D investment target (the so-
called Barcelona target), the progress of the Members States regarding their R&D
investments and, more importantly, their R&D intensities, has become a central
topic in the ongoing debate about Europes innovation and R&D performance. The
R&D investment intensity ratios (R&D expenditures as a percentage of GDP) are
used as the main indicators for monitoring R&D and innovation performance.
Recently, however, there are concerns expressed about the use of these intensity
ratios as (the sole) indicators of a nations innovativeness (Zuleeg, 2008).
In general, Europe (EU27) shows lower R&D investment intensities than the US and
Japan. These differences are not necessarily due to the importance given to R&D in
general, but are also the result of structural differences (e.g. industry/sector
structure) among these regions. The R&D intensity in 2005 in the EU27 was 1.84%,
compared with 2.68% in the US and 3.18% in Japan. In 2005, Chinas R&D
investment intensity amounted 1.34%, which reflects the fast pace of R&D
investment growth in this country. Difference in R&D intensities among the Triad
regions mainly reflect differences in levels of privately funded R&D. In 2004, for the
EU27, R&D financed by the business sector was equal to 55% of total R&D
investments, compared to 64% in the US, 76% in Japan and 66% in China.
Also within the EU27 there are large differences. There are countries that show
impressive growth rates in R&D intensities: in 2005 already, Sweden and Finland
demonstrated R&D intensities above the overall 3% target, respectively 3.86% and
3.48%. All other EU27 Member States show R&D intensities below 3%, 21 states
even below the EU-average of 1.84%. At the same time, several Member States
have increased their budgets for R&D (in real terms), e.g. Ireland and Spain which
have doubled their real R&D expenditures between 1995 and 2005. Growth in
absolute terms is also registered for Austria, Greece and Portugal. Despite these
significant growth rates in absolute terms for many of the EU27 Member States, it
seems rather disappointing to have to conclude that the R&D intensity ratios only
reflect this partially.
The question that arises with many policy makers is then whether the R&D intensity
indicators are adequate to measure a nations R&D investment performance, and if
yes, what are the limitations? From a measurement point of view, one could argue
that the stagnation (and even decline) of R&D intensities can be partly attributed to
higher growth rates of GDP. This is certainly an interesting argumentation which
may hold (as we will see) for a certain period of time, namely the period in which
economic growth evolves faster than the growth in R&D investment. At some point
8
in time, by simplifying, R&D investments and R&D intensities are expected to catch-
up and to reach a sort of (temporary) equilibrium.
At the same time, it is also important to understand how these fluctuations in R&D
investments affect the research potential of countries. For example, growth in R&D
investments do not necessarily translate in higher levels of research potential
(more research output or more researchers) but may very well translate in higher
wages for existing researchers: not more research thus, but more expensive
research. The latter is difficult to investigate in view of the only partially available
data, but the former can be investigated by looking at the levels of R&D personnel
(input) and the levels of publication output (performance).
The contribution of this small-scale study to the above summarized debate is

twofold: first of all the relationship between levels and growth patterns of GDP and
R&D over time are investigated; secondly, the relationship between publicly funded
R&D and the research potential of a country is analysed as well. The focus of the
study lies on the analysis of quantitative patterns and developments rather than
the more qualitative explanation of these patterns.
1.2 The analytical framework

The analytical framework setup for this study is based on a thorough screening of
the literature on the topic (see Box 2 for several highlights). This has lead to a so-
called conceptual framework, which formed the basis for a number of statistical
analyses (e.g. regression analyses, time series analyses). The main two objectives
of the study can thus be summarised as follows:
1. To analyse and understand the co-evolution of R&D expenditure, R&D

intensity and GDP growth over time and the interrelation between R&D
expenditures and GDP growth.
2. To analyse and understand the relationship between public R&D

expenditures and the public research base.
As mentioned in the Terms of Reference for this study some Member States have
impressive developments in R&D intensities, whereas others have managed to
increase R&D expenditures, but have experienced stagnating or declining R&D
intensities due to strong underlying GDP growth; therefore in order to properly
assess progress on the 3% R&D investment target, there is a need for the
Commission to better understand these developments.
9
These two objectives are too broad to form a basis for analysis. Therefore, a further
breakdown in research questions seemed appropriate. The following research
questions have thus been formulated in order to guide the research efforts.
1. Can high GDP growth be considered as a reason for the stagnation (or even
decrease) of R&D intensity in the EU?
a. What are the tendencies within the EU regarding the evolution of R&D
intensity?
b. How can the EU compare to the US and Japan with respect to R&D funding
and R&D intensities?
c. Does R&D intensity differ substantially between countries with high GDP
growth rates and countries with low GDP growth rate?
d. Are there any country differences detected in the relationship between
R&D and GDP?
2. What is the effect of public R&D on the research base?
a. How does public R&D affect the research output?
b. How does public R&D affect the research input?
Box 1: Highlights literature review
Innovative activity can depend on market demand following the fluctuations in economic activity
(Schmookler, 1966).
There are both pro- and counter-cyclical patterns of business innovative activities found (Heger,
2004).
Support is found on the pro-cyclical (positive correlation of R&D with the overall state of the
economy) arguments on R&D (Hall and Mairesse, 1995)
Pro-cyclical behaviour of innovation and patents is found in the UK during 1948-83 (Geroski and
Walters, 1995).
It is found that the effect of government funding on business R&D depends on its level as it varies
with respect to its generosity: it increases up to a certain threshold and then decreases beyond
that point (Guellec and Van Pottelsberghe, 2003).
Increasing dependence of patents on results of publicly funded basic research is found, indicating
increasing science-technology links (Narin et al., 1997).
Publicly-funded research is found not to substitute industrial R&D but instead, it stimulates
industrial R&D, i.e. crowding-in (Nelson, 1994).
Publications resulting from publicly funded research are found to expand the opportunities of
companies to access this stock of knowledge (Dasgupta and David, 1994).
First of all we have produced descriptive statistics on the evolution of R&D

expenditures and GDP in the EU-27, thereby comparing to the US and Japan. In a
second stage the analysis focused on a subset of the EU countries (France,
Germany, the UK, Spain, Austria, Italy, Ireland, the Netherlands, Greece, Denmark,
Finland, Slovenia, and Latvia), the US and Japan. However, due to data availability
reasons, the more elaborative statistical analyses have been carried out for the
whole of EU27, US and Japan. The data and indicators (see Box 2) used for this
study have mainly been derived from the official data providers Eurostat and the
10
OECD. Data collection phase was carried out during the summer of 2008, meaning
that data available at that point in time were collected.
During the study, and mainly in the phase of interpretation of the outcomes, we
involved a number of experts in the field:
Dominique Guellec (OECD)
Hugo Erken (Ministry of Economic Affairs in The Netherlands)
Nick Von Tunzelmann (SPRU, University of Sussex, UK)
Piet Donselaar (Ministry of Economic Affairs in The Netherlands)
Philip Shapira (University of Manchester and Georgia Institute of Technology

in the US)
Evanthia Schmidt (Aarhus University, Denmark)
Gonzalo Len (Polytechnic University of Madrid, Spain)
Antoine Schoen (ESIEE Engineering, France)
Andreas Reinstaller (WIFO, Austria)
Kai Husso (Ministry of Employment and the Economy, Finland)
Maja Bucar (University of Ljubljana, Slovenia)
11
Box 2: Collected data and indicators
The following data and indicators were collected.
Data on macro-economic conditions:

o GDP (in nominal and real terms)
o GDP growth
Financial market and financial resources:
o Real interest rate
o Venture capital
Market regulations:
o Labour market regulations: Employment Protection Legislation (EPL)
o Restrictions on inward FDI
o IPR system
STI resources:
o Research input (human resources in R&D)
R&D personnel
Scientists and engineers
Number of graduates
Number of researchers
o Research output
Publications
Patenting activity
Public policies:
o Public R&D expenditures (also as percentage of GDP) in real terms, split up (if
appropriate) between
Government-sector expenditures on R&D (GOVERD), and
Higher-education sector expenditures on R&D (HERD)
Government budget appropriation or outlays for R&D (GBAORD)
R&D expenditure:
o Gross R&D expenditures (GERD) and percentage of GERD in GDP (by sources of
financing)
o Business Enterprise R&D expenditures (BERD) and percentage of BERD on GDP
For more details on the approach we refer to the technical report (part 2). In the
subsequent sections of this part, we shall focus on the main findings of this study
(where possible, on a country by country basis).
12
2 Co-evolution of R&D expenditures and GDP

growth over time
When comparing R&D intensities (see figure 1) in the so-called Triad regions (EU,
US and Japan) we see that Japan has by far the highest R&D intensity (in 2005,
3.32%) ratio, followed by the US (in 2005, 2.61%) and the EU27 (in 2005, 1.84%).
This gap in R&D intensities between the US and EU or Japan and the EU can to
some extent be accounted for by the gap in privately funded R&D intensities.
Figure 1: R&D intensity among the Triad regions (GERD as % of GDP), 1995-2005
3,6
R&D Intensity (GERD as % of GDP)
3,4
3,2
3
2,8
2,6
2,4
2,2
2
1,8
1,6
1,4
1,2
1
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
EU15 EU27 Japan United States
When we look at the shares of R&D funding by the various sectors (private, public),
the privately funded R&D share in Japan and in the US is remarkably higher than in
the EU27 (see figure 2). The private sector contribution to the funding of R&D has
more or less stagnated in the EU27 during 1995-2005, whereas especially in Japan,
the share of R&D expenditures financed by the business sector has considerably
increased. On the other hand, publicly financed R&D is the highest in the EU,
compared to the US and Japan.
13
Figure 2: GERD financed by business enterprises and by government as % of GDP: 1995-

2005
Private sector ____

2,5
GERD as a % of GDP
JP
2 US
EU27
1,5
US
1 EU27
JP
0,5
Public sector ----
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
As other scholars have pointed out, this funding gap can largely be attributed to
the industrial/sectoral structure of the EU compared to the US and Japan. The
value-added shares of high-tech sectors in the EU are smaller than in the US or
Japan; the EU is mainly specialized in medium-tech sectors. This difference in
industrial structures provides a possible explanation for the differences in R&D
intensities, although this type of explanation goes beyond the mandate of this study.
The R&D intensity indicator is the result of R&D investments in absolute terms,
divided by GDP in absolute terms. This implies that when GDP (economic growth)
grows much faster than R&D investments in a certain period, the R&D intensity
indicator may slightly drop, in that specific period. Presumably, until R&D
investments (public and/or private) catch-up as well. This is a pure statistical
reasoning and does not necessarily reflect the real drivers of GDP and or R&D
investments (cf. growth theory). The issue is reduced to the question whether the
R&D intensity indicator is influenced by periods of fast GDP growth or GDP decline.
In order to address this question we have used a simple approach. We have

computed the average R&D intensity of the group of countries with high GDP
growth and the group of countries with low GDP growth (the former is 1.4% and
the latter is 1.6%). The difference between the two averages is statistically
significant, which suggests that countries with higher GDP growth (and not equally
growing R&D expenditure) show on average lower R&D intensities. In figure 3 we
present an overview of the real GDP growth in relation to real growth in GERD.
14
Figure 3: Real GDP Growth and Real Growth in GERD between 1995-20051,2,3
250
LT
200
Real Growth in GE RD 1995-2005
150
LV
FI
ES IE
100 ATCZ EL HU
PT
DK
SE
50
US SI PL
BE
DE
JPIT EU15
FR NLUK
0 BG
0 20 40 SK 60 80 100 120
-50
Real GDP Growth 1995-2005
Source: Eurostat
1
For Luxembourg, Cyprus, Estonia, Malta, Romania and EU27 average: data on Real GERD (in Millions
of 1995 PPS) are not available for the year 1995.
For Malta and Romania: data on Real GDP were not available for the year 1995.
3
The data on the EU15 average of real GERD in 2005 and 2004 were still only provisional numbers, so
we have taken the data on real GERD for the EU15 average for 2003 instead of 2005. The percentage
change in Real GERD for the EU15 is thus the difference in real GERD between 1995 and 2003.
A 45 degree line has been added to the graph to assist in deriving the following
interpretation: countries situated below this line have experienced higher GDP
growth than growth in R&D expenditures; countries situated above the line have
experienced lower growth in GDP than in GERD. If a large proportion of EU Member
States lies below the 45 degree line, this would indicate that the stagnating R&D
intensity in the EU coexists with a higher real GDP growth. We should note that this
graph shows the relative change in GERD with respect to the relative change in
GDP for the period 1995-2005, it however does not investigate the relationship
between GDP growth and GERD growth (as indicated elsewhere).
A second, more complex, line of reasoning is based on a so-called panel data

analysis where we econometrically tested for the relation between GERD and GDP
(logarithmic differences have been used). Based on the coefficient in the regression
(0.7689) which relates the log difference of GERD to the log difference of GDP, we
see that (since this is lower than 1) the percentage increase in GERD at time t will
15
be less than the percentage increase in GDP in t-1 (see Table 10 of the Technical
Report). This also suggests that GDP growth is not immediately followed by growth
in R&D investments, which subsequently (temporarily) influences the R&D intensity
ratio. Country specific patterns and evolutions will be depicted in chapter 4 of Part 1.
Both indications suggest that R&D intensity indicators are influenced by abrupt
changes on GDP growth patterns (albeit this being of a temporary nature). The
potential message to policy makers thus (see chapter 4 of Part 1) would be to take
a more longitudinal approach in comparing and evaluating R&D intensities (and
growth patterns).
In the subsequent chapter, we shall investigate the relation between R&D

expenditure, mainly publicly funded R&D, and the research base.
16
3 Publicly funded R&D and its influence on the

research base
The second objective of this study has focused on the effect of public R&D on the
research base of the countries. Here, with research base we imply both the
research input and the research output of the R&D process. We proxy research
output with the number of publications and the patent applications and research
input with R&D personnel. Underlying this, we also looked into the question
whether there is any evidence that higher levels of public R&D expenditures do not
necessarily lead to more R&D personnel, and thus a higher R&D performance
capacity. Higher publicly funded R&D expenditures may very well flow into new R&D
instrumentation and/or higher wages for existing R&D personnel. In view of the
problems of obtaining data on researchers wages, we have limited the discussion
to the number of R&D personnel (in FTE).
On an overarching level of analysis, we have applied panel-data regression analysis

(taking into account the data for all EU27 including the US and Japan). The
estimations indicate that R&D performed by the government significantly affects the
level of research input and output. The research output is proxied by the number of
publications and the number of patent applications. In both cases the positive effect
is statistically visible for up to 8 years (time lags); (see Table 11 of the Technical
Report).
We consider R&D personnel as an appropriate indicator as it includes not only

researchers and scientists, but also people providing direct services to the
research/innovation process, e.g. R&D managers, administrators, etc. (see also
Eurostat, 2008). R&D performed by the government affects positively the share of
R&D personnel in the R&D systems with a time lag of up to 2 years. But as the
individual country fiches presented below show, this varies strongly from one
country to another. In general however, based on our regression analysis, one can
conclude that higher levels of public R&D expenditures positively influence the
future levels of R&D personnel.
17
4 Country specific findings
4.1 Introduction
Besides the above discussed general findings, which are based on a more
aggregate type of analysis, it is also of interest to zoom into the specific
characteristics of individual countries (as far as available data allows).
Subsequently, we will zoom into R&D and GDP co-evolution patterns and the
influence on the research based of France, Germany, the UK, Spain, Austria, Italy,
Ireland, the Netherlands, Greece, Denmark, Finland, Slovenia, Latvia and Poland,
the US and Japan.
For each country, two blocks of analysis and discussion will be presented.
1. R&D expenditures and co-evolution with GDP
2. Research base and relation with publicly funded R&D
18
4.2 France
A. R&D expenditure patterns and co-evolution with GDP
Gross Expenditures on R&D (GERD) Gross Domestic Product GERD/GDP ratio
Country 1995 2005 % change 1995 2005 % change 1995 2005 % change
(Millions of 1995 PPS) (Millions of Chain linked 2000 Euros)
France 23091 26746 16 1255031 1565465 25 2,29 2,12 -7
EU27 1 1408045 114891 -186 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
France France
GERD in millions of PPS at 1995 prices

28.000 16.000
1.800.000
Real GDP in millions of euro

14.000
1.600.000 24.000 1.800.000 12.000
1.600.000 10.000
1.400.000
20.000 8.000
1.400.000
1.200.000 6.000
1.200.000
16.000 4.000
1.000.000 1.000.000
12.000 800.000
800.000 1980 1985 1990 1995 2000 2005
1980 1985 1990 1995 2000 2005
Real GDP
GERD Real GDP GERD (funded by business)
GERD (funded by government)
Despite a continuous growth of GDP, we see that between 1995-2000 GERD has stabilized
In the period after 2000, GERD grew faster than real GDP
Since 2005, GERD and GDP seems to co-evolve
From 1993 onward, publicly funded R&D declined, despite the growth of GDP; this until 1997 where it
started following GDP again
Privately funded R&D continued to follow the evolution of GDP
Around 2001, privately funded R&D grew faster than GDP
Real GDP interrelates with levels of GERD with a delay of 1-4 years; a co-integrating relationship
occurs after 3 years
Privately funded R&D is not that volatile to changes in GDP, whereas publicly funded R&D is
B. Research base and relation with publicly funded R&D
R&D-personnel1 Scientists and engineers2 Graduates2
France 1,64 1,73 5% 4,60 5,80 26% 18,50 22,50 22%
EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%

3, 4, 5, 6
US 9,20 10,60 15%
France
R&D personnel in full time equivalents
11.000
Between 1990 and 1993 publicly funded R&D
10.000 grew much faster than the number of R&D
personnel
400.000 9.000
This may suggest that the extra funds were
300.000 8.000 absorbed by other factors than numbers of R&D
personnel (e.g. wages and/or equipment)
200.000 7.000
Interesting enough, from 1996 onwards, public
100.000 funding of R&D and the numbers of R&D
personnel follow each other quite well
0
1980 1985 1990 1995 2000 2005
R&D personnel (all sector)

R&D personnel (government sector)
GERD by government
19
4.3 Germany
Germany 33804 43564 29 1867388 2122106 14 2,19 2,48 13

5 6
EU271 140804 114891 -18 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Germany Germany

48.000 32.000
28.000

2.300.000 44.000 24.000
2.200.000 20.000
40.000
2.300.000 16.000
2.100.000
2.200.000 12.000
2.000.000 36.000
2.100.000
1.900.000 2.000.000
32.000
1.900.000
1.800.000
1.800.000
1.700.000 1.700.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
GERD Real GDP Real GDP

GERD (funded by business)
GERD (funded by goverment)
GERD and Real GDP have nicely coevolved between 1994 and 1998
In the period 1998-2000 GERD has increased steeper than GDP
In 2003/2004 we see a consolidation of both GERD and Real GDP
After a status quo in real GDP early 2000, the two series seem to evolve similarly after 2005
Since 1993 R&D funded by the government seems to be stable over time
Business funded R&D has, after a decline in 1990-1995, grown since the late 1990s
Business funded R&D seems to follow a more volatile path than public funded R&D
2000 2005 % change 1998 2005 % change 1998 2005 % change

Country
Germany
1,85 5,90 6,60 12% 8,80 9,70 10%
EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%

3, 4, 5, 6
US 9,20 10,60 15%
Germany
R&D personnel has grown strongly between

14.000
13.600
1990-1991
After 1991 a decline trend can be observed
13.200
until the turnaround in 1996
12.800
600.000 Between 1998 and 2003 publicly funded
500.000 12.400 R&D grew much faster than the number of
400.000 12.000 R&D personnel
300.000 Although public funded R&D decreased
200.000 substantially between 2003 to 2005, R&D
100.000 personnel has continued increasing; this
0 may point to alternative sources of funding
1980 1985 1990 1995 2000 2005
R&D personnel (all sectors)

GERD by government
20
4.4 United Kingdom

UK 18409 22048 20 1343023 1776388 32 1,94 1,76 -9

5 6
EU271 140804 114891 -18 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
UK UK

24.000 11.000
10.000

2.000.000 22.000 9.000
1.800.000 8.000
20.000 2.000.000
7.000
1.600.000 1.800.000
6.000
18.000 1.600.000
1.400.000 5.000
1.400.000
16.000
1.200.000 1.200.000
1.000.000
1.000.000 14.000
800.000
1980 1985 1990 1995 2000 2005
800.000
1980 1985 1990 1995 2000 2005
Real GDP
During the period 1995-2005 the percentage increase in GDP in the UK was higher than that of GERD
resulting in lower levels of the R&D intensity indicator
Real GDP is constantly increasing the last 25 years; GERD is also increasing showing however more
fluctuations over time
GERD funded by the government has seen a decline in the period 1985-1995 not matched however by
business-funded R&D
Since 1995 publicly funded R&D is increasing as well
Intuitively, we do not see a strong co-evolution between business funded R&D and Real GDP evolution
Statistically, we find that GDP only affects GERD after about 5 years (Granger causality)
UK 7,80 5,60 -28% 15,50 18,40 19%

EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%

3, 4, 5, 6
US 9,20 10,60 15%
UK Between 1980 and 1993 R&D personnel

8.000 has been steadily decreasing, in line

7.500 with the decrease in publicly funded R&D
7.000 From 1995 onwards, publicly funded
400.000
6.500 R&D is regaining ground and thus
6.000 increasing
300.000
5.500 The fragmented data available show
200.000 higher levels of R&D personnel around
100.000 2005, which may suggest indeed that
0
additional public funding translated into
1980 1985 1990 1995 2000 2005
more R&D personnel
R&D personnel (goverment sector)
GERD by government
21
4.5 Spain
Spain 4204 8533 103 515405 740129 44 0,79 1,12 42
EU27 1 1408045 114891 -186 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Spain Spain

5.000
10.000
900.000

900.000
4.000
800.000 8.000 800.000
3.000
700.000
700.000 6.000 2.000
600.000
600.000
4.000 500.000 1.000
500.000 400.000 0
2.000
400.000 300.000
1980 1985 1990 1995 2000 2005
0 Real GDP
300.000
1980 1985 1990 1995 2000 2005 GERD (funded by business)
GERD Real GDP
Spain is a nice example of almost perfect co-evolution between GERD and Real GDP
GERD and real GDP have nicely co-evolved since the 1980s; even the flattening of the curves in the
early 1990s is similar
Deviations in the last years are due to larger increase in Government budget for R&D
As a result, we also statistically find fast response time (lags) between GERD and GDP (1 year)
Both government-funded R&D and business-funded R&D closely follow the growth path of real GDP
A co-integration relationship (1 year) between GERD and Real GDP confirms the close interrelation
In the early 90s both business-funded and government-funded R&D have grown until the mid-1990s,
until Real GDP growth slowed down a bit
Spain shows how the effort on R&D follows the cycles of the economy, as increases (decreases) in real
GDP are followed by increases (decreases) in GERD with some time lag

Country
Spain
1,49 4,60 5,40 17% 8,00 11,80 48%
5
EU27 1,36 1,45 7% 5,50 8,80 13,20 50%
3, 5, 6
Japan 1,71 12,30 13,70 11%
3, 4, 5, 6
US 9,20 10,60 15%
Spain
5.000
R&D personnel and government-funded
4.000 R&D follow similar growth patterns from
200.000
1980 onwards
3.000
150.000
R&D personnel has increased more rapidly
2.000 than government-funded GERD between
100.000
1.000
1990-1994 followed by a decrease around
1995
0
50.000 After 1995 the two series are increasing
following a similar growth pace
0
1980 1985 1990 1995 2000 2005

GERD by government
22
4.6 Austria
Austria 2430 4775 96 179137 225483 26 1,54 2,43 58
EU27 1 1408045 114891 -186 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Austria Austria
G ERD in millions of PPS at 1995 prices

6.000 2.500
280.000

5.000 280.000 2.000
240.000
4.000
240.000 1.500
3.000
200.000
200.000 1.000
2.000
160.000 160.000 500

1.000
0 120.000
120.000 1980 1985 1990 1995 2000 2005
1980 1985 1990 1995 2000 2005

GERD and real GDP have both increased in the period 1995-2005; however, the percentage increase of
real GDP has been lower than that of GERD
Since the 1980s GERD and GDP seem nicely co-evolve
Both government-funded R&D and business-funded R&D seems to closely follow Real GDP growth
Business funded R&D grows faster than Real GDP from 2000 onward; we see that publicly funded R&D
follows this growth pace since 2005
A co-integration relationship between GERD and Real GDP (1 year time lag), indicates the close
evolution over time
Austria 2,40 3,60 50% 7,90 9,80 24%

EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%

3, 4, 5, 6
US 9,20 10,60 15%
Austria
2.000
1.750
60.000 The number of R&D personnel is
1.500
50.000
constantly increasing since 1980s
1.250
Government-funded R&D seems to
40.000
1.000 follow a similar path, however data
30.000
750 availability is significantly restricted
20.000
500 here (only a few data points available)
10.000 Nevertheless, publicly funded R&D
0 seems to feed into the growth pattern
1980 1985 1990 1995 2000 2005
of R&D personnel in Austria
GERD by government
23
4.7 Italy
Italy 9827 12645 29 1084023 1243525 15 0,97 1,09 12
EU27 1 1408045 114891 -186 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Italy Italy

14.000 7.000

6.000
1.300.000 12.000
1.300.000 5.000
1.200.000
10.000 1.200.000
1.100.000 4.000
1.100.000
1.000.000 8.000 1.000.000 3.000
900.000 900.000
6.000 800.000
800.000
700.000
1980 1985 1990 1995 2000 2005
700.000
1980 1985 1990 1995 2000 2005
Real GDP
Over the period of 1995- to 2005 both real R&D and GERD have increased
GERD seems to have increased faster than real GDP in the period 1985 to 1990
A decline in GERD has followed after that and until 1995; at the same period real GDP has continued to
increase
The statistical tests indicate that a co-integrating relationship between real GDP and GERD exists with
a 2-year lag; Granger causality tests indicate a relationship with a 4 year time lag, meaning that a
change in the values of the one is followed by the other after 4 years
Business-funded R&D and government-funded R&D follow similar growth paths, increasing from 1980
till the early 1990s and decreasing thereafter until 1995; no data is available for the following periods
Italy 1,08 1,23 14% 3,00 3,70 23% 5,10 12,40 143%
EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%

3, 4, 5, 6
US 9,20 10,60 15%
Italy
7.000
R&D personnel has been increasing
6.000
steadily since the 1980s, similar to the
200.000
5.000 growth path of publicly funded R&D
160.000 4.000
The decline in publicly funded R&D after
120.000
1990 is partly mirrored in the number of
3.000
80.000
R&D personnel (less sharp however)
Since 2000 R&D personnel is increasing;
40.000
however, no data for government-funded
0
1980 1985 1990 1995 2000 2005 GERD is available to compare with
GERD by government
24
4.8 The Netherlands

Netherlands 5513 6305 14 342776 443937 30 1,97 1,74 -12

5 6
EU27 1 140804 114891 -18 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
The Netherlands The Netherlands
GERDin millions of PPS at 1995 prices

3.600
7.000

3.200
500.000
2.800
6.000
450.000 500.000
2.400
450.000
400.000 2.000
5.000 400.000
350.000 1.600
350.000
300.000
4.000
300.000 250.000
200.000
250.000 1980 1985 1990 1995 2000 2005
3.000
200.000 Real GDP

1980 1985 1990 1995 2000 2005 GERD (funded by business)
GERD Real GDP
GERD and real GDP have increased steadily between 1995 until 2005; over that period, the percentage
change of GDP is higher than that of GERD
GERD and real GDP have followed similar growth paths since 1980; GERD seems to be more volatile
over time compared to real GDP; the slight stagnation around 2000 is reflected in both variables
The tests indicate that a co-integrating relationship between real GDP and GERD exists with a 1-year
lag; this means that GDP and GERD follow each other closely
Both business-funded and government-funded R&D seem to be more volatile over time than real GDP
From 1995 onwards we see business and publicly funded R&D evolve differently; whereas publicly
funded R&D is stabilizing and even decreasing, business funded R&D continues to grow
Netherlands 1,40 6,10 6,90 13% 6,00 8,60 43%

EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%

3, 4, 5, 6
US 9,20 10,60 15%
The Netherlands
2.600
2.400
R&D personnel has been increasing
2.200
steadily since the 1980s
100.000 2.000 In view of the fact that publicly
80.000 1.800 funded R&D has been fluctuating
60.000 1.600 more over time, it seems that the
40.000 R&D personnel volume has evolved
20.000
rather independently from publicly
0
funded R&D (see evolution in times of
1980 1985 1990 1995 2000 2005 decline in publicly funded R&D)
GERD by government
25
4.9 Greece
Greece 508 1000 97 116419 170799 47 0,43 0,58 35

5 6
EU271 140804 114891 -18 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Greece Greece

1.200 500
200.000

1.000 200.000 400
180.000
800
180.000 300
160.000
600
160.000 200
140.000
400
140.000 100
120.000 200
120.000 0
0
100.000
1980 1985 1990 1995 2000 2005 100.000
1980 1985 1990 1995 2000 2005
GERD Real GDP
Real GDP
GERD and real GDP have increased steadily between 1995 and 2005; the percentage change of GERD is
higher than that of real GDP
In view of the data points available, it is interesting to note the almost parallel co-evolution between
publicly and privately funded R&D
Due to the scarce data available, our statistical test do not reveal any additional significant results

Country
Greece
1,41 4,00 4,50 13% 10,10
13,2
EU275 1,36 1,45 7% 5,50 8,80 50%
0
12,3 13,7
Japan3, 5, 6 1,71 11%
0 0
3, 4, 5, 6 10,6
US 9,20 15%
0
Greece
500
40.000
400
30.000
300
Data availability is significantly restrictive
20.000 here; however, again by looking at the data
points one notices the co-evolution between
200
10.000 publicly funded R&D and the R&D personnel
100
0
1980 1985 1990 1995 2000 2005

GERD by government
26
4.10 Denmark
Denmark 1839 3038 65 150803 184794 23 1,82 2,45 35

5 6
EU271 140804 114891 -18 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Denmark Denmark

3.500 2.000

200.000 3.000 1.600
2.500 1.200
180.000
200.000
2.000 800
160.000 180.000
1.500 400
140.000 160.000
1.000 0
140.000
120.000 500
120.000
100.000
1980 1985 1990 1995 2000 2005 100.000
1980 1985 1990 1995 2000 2005
GERD Real GDP
Real GDP
For Denmark, GERD and real GDP have increased between 1995 until 2005; the percentage change of
GERD is higher than that of real GDP
GERD and real GDP follow a similar co-evolution path over time
The statistical tests moreover indicate that a co-integrating relationship between real GDP and GERD
with a 1-year time lag; the Granger causality test shows mutual influence after 1 year
Government-funded and business-funded R&D have moved almost identically between 1980 and 1995;
After 1995, privately funded R&D seems to take off in comparison to publicly funded R&D
Denmark 2,07 2,44 18% 5,20 7,10 37% 8,10 14,70 81%
EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%
US3, 4, 5, 6 9,20 10,60 15%
Denmark
900
800
R&D personnel in Denmark is
constantly increasing since 1980;
50.000 700 around 1985, the number has jumped
40.000 600
up to a significantly higher level
Government funded R&D has also
30.000 500 increased steadily
20.000 It seems that levels of publicly funded
400
R&D co-evolve with levels of R&D
10.000 personnel
0
1980 1985 1990 1995 2000 2005

GERD by government
27
4.11 Finland
Finland 1826 4012 120 104781 149810 43 2,26 3,48 54

5 6
EU271 140804 114891 -18 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Finland Finland

5.000 3.000
180.000

2.500
4.000 2.000
160.000
180.000 1.500
3.000 1.000
140.000 160.000
500
140.000
2.000 0
120.000
120.000
1.000 100.000
100.000
80.000
1980 1985 1990 1995 2000 2005
0
80.000
1980 1985 1990 1995 2000 2005 Real GDP
GERD Real GDP GERD (funded by government)
GERD and real GDP have increased between 1995 until 2005; the percentage change of GERD is higher
than that of real GDP resulting in a percentage increase in the R&D intensity for the same period
GERD and real GDP are increasing since 1980; real GDP dropped after 1990 following the fall of the
iron curtain and the associated disruptive impact on the Finnish economy
Both real GDP and GERD have increased from the mid-1990s
Since 1995, business funded R&D seems to increase faster than government funded R&D
The tests indicate that a co-integrating relationship between real GDP and GERD exists with a three-to-
five-year lag
The main exception to this long-term relationship is detected at the beginning of the 1990s when,
while Finland was hit by a severe recession, total R&D expenditure continued to grow (albeit at a
slower pace). Both the publicly-funded and the privately-funded R&D expenditure continued to grow.
This indicates not only a strong public commitment to the support of R&D, but also the leverage effect
of public expenditure on business R&D in a period of recession.
Finland 2,95 3,22 9% 8,60 7,50 -13% 15,90 17,70 11%

EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%
US3, 4, 5, 6 9,20 10,60 15%
Finland
1.200
1.000
60.000
50.000
800 Data availability on R&D personnel and
40.000 600
government-funded R&D is significantly
restrictive here
30.000 400
However, both R&D personnel and
20.000
200 government-funded R&D seems to follow
10.000
similar increasing paths
0
1980 1985 1990 1995 2000 2005 The increase in both series seems to have
R&D personnel (all sectors) slowed down after 2000
GERD by government
28
4.12 Slovenia1
Slovenia 331 462 40 17105 25249 48 1,55 1,46 -6

5 6
EU271 140804 114891 -18 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Slovenia Slov enia
GERDinm
350
550
illionsof euro
300
500
32.000 250
illionsof PPSat 1995prices

450 32.000 200
28.000
DPinm
28.000 150
400
24.000 100
24.000
350
Real G
20.000
20.000 300 16.000
250 12.000
16.000 1980 1985 1990 1995 2000 2005
Real GDP
12.000
1980 1985 1990 1995 2000 2005 ERD (funded by business)
GERD Real GDP
Slovenia, a catching-up economy, has known an increasing level of GERD since 1995; the percentage
change of GERD is lower than that of real GDP
GERD shows a considerable degree of volatility over time, opposed to the steady economic growth over
time; around 2003, we find a steep increase in GERD.
The statistical tests show the existence of Granger causality (1 year time lag) and co-integration;
however, the data available is limited and thus one has to interpret these findings with care
Business-funded and government-funded R&D show a decrease early 2000, followed by an increasing
trend afterwards; business and publicly funded R&D have reacted to each other
Both business and publicly funded R&D react strongly to GDP changes (time lags of 1 year), based on
the Granger causality test
Slovenia 1,36 1,33 -2% 3,40 5,50 62% 8,00 9,80 23%
EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%
US3, 4, 5, 6 9,20 10,60 15%
Slovenia
200
180 R&D personnel and government-funded
160 R&D follow a very similar pattern since
140
the early 1990s until 2002/2003, showing
120
10.000
however large fluctuations over time
8.000 100
It seems that the number of R&D
6.000
4.000
personnel reacts strongly to fluctuations
2.000 in publicly funded R&D, which seems less
0 surprising for a small catching-up
1980 1985 1990 1995 2000 2005
economy, where R&D (and funding for
R&D personnel (government sector) R&D personnel) often depends a lot on
GERD by government public funding
1 While we have been using Eurostat data, an expert opinion has drawn our attention on the fact that the sharp
fluctuations in GERD (in 2003) and R&D personnel (in 2004) may be due to statistical errors or exchange rate
fluctuations. These fluctuations and their possible causes are still subject to discussion between Eurostat and the
Slovenian Statistical Institute.
29
4.13 Latvia
Latvia 54 123 129 6527 12592 93 0,47 0,56 19

5 6
EU271 140804 114891 -18 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Latvia Latvia

200 100

80
160 18.000
18.000 60
16.000
16.000 120 40
14.000
14.000
12.000 20
80
12.000
10.000 0
10.000 40 8.000
8.000 6.000
1980 1985 1990 1995 2000 2005
6.000
1980 1985 1990 1995 2000 2005 Real GDP
GERD Real GDP GERD (funded by government)
Latvia, another catching-up economy, shows co-evolution of GERD and real GDP; they have increased
between 1995 until 2005; the percentage change of GERD is higher than that of real GDP
Real GDP and GERD seem to follow the same pattern of evolution since 1990
A significant decrease in real GDP is observed around 1993 which co-insides with a decline in GERD
Around 2003, GERD takes off and starts growing faster than Real GDP; the statistical tests show that
both entities relate to each other in their co-evolution path
Between 1995 and 2003 both business-funded and government-funded R&D remain roughly constant;
a strong increase of both public and private funded R&D is seen around 2003
Latvia 0,87 0,92 6% 4,70 4,30 -9% 6,10 9,80 61%

EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%

3, 4, 5, 6
US 9,20 10,60 15%
Latvia
100
80
Government funded R&D seems to have been
60 stable between 1995-2003, after which a
8.000 strong increase can be observed
40
Around 2003 a similar pattern to Slovenia
6.000
20 appears: both publicly funded R&D and the
4.000 volume of R&D personnel increase strongly
2.000
0
1980 1985 1990 1995 2000 2005

GERD by government
30
4.14 United States

US 154414 221825 44 8696081 11898549 37 2,49 2,61 5

5 6
EU271 140804 114891 -18 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US US

240.000 160.000
14.000.000 140.000

200.000 120.000
12.000.000 100.000
14.000.000 80.000
10.000.000 160.000
12.000.000 60.000
40.000
8.000.000 10.000.000
120.000
8.000.000
6.000.000
80.000 6.000.000
4.000.000 4.000.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

For the US we see that GERD and Real GDP co-evolve over time; around 1995 however we see that
GERD spending grows faster than GDP
The percentage change of GERD is higher than that of real GDP; this leads to high R&D spending
intensities
Government funded R&D evolves steadily over time, while business funded R&D grows faster since
1995; especially in the period 1995-2000 business funded R&D grew faster than real GDP
Co-integration tests indicate that a co-integrating relationship between real GDP and GERD exists with
a 3-year lag

% % %
2000 2005 1998 2005 1998 2005
Country change change change
US3, 4, 5, 6 9,20 10,60 15%
5
EU27 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5,
6 1,71 12,30 13,70 11%
No data available on R&D personnel for the US
31
4.15 Japan
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
EU27 1 1408045 114891 -186 7972659 10028033 26 1,81 1,84 2
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Japan Japan

90.000 80.000
5.800.000

80.000 60.000
5.600.000
70.000 40.000
5.400.000
5.800.000
60.000 20.000
5.200.000 5.600.000
5.400.000 0
50.000
5.000.000
5.200.000
40.000 5.000.000
4.800.000
4.800.000
30.000
4.600.000
1980 1985 1990 1995 2000 2005 4.600.000
1980 1985 1990 1995 2000 2005
GERD Real GDP

Real GDP
For Japan it is interesting to note how Real GDP grows faster than GERD since 2002
GERD and real GDP have increased between 1995 until 2005; the percentage change of GERD is higher
than that of real GDP resulting in high R&D intensities
Levels of government-funded R&D are rather stable over time as opposed to levels of business funded
R&D
Business-funded R&D is increasing since 1980; this increase seems to have been stronger in the period
1980-1990 compared to the period 1990-2000

Country
3, 5, 6
Japan 1,71 12,30 13,70 11%
5
EU27 1,36 1,45 7% 5,50 8,80 13,20 50%
3, 4, 5, 6
US 9,20 10,60 15%
Japan
16.000
14.000
R&D personnel and government-funded R&D
12.000
are both increasing over time in the period
1.000.000 10.000 1980-1995
800.000 8.000
From that point onwards, both variables
600.000
evolved in a different direction
R&D personnel stays more or less at the 1995
400.000
levels, whereas publicly funded R&D
200.000
continues to grow
0
1980 1985 1990 1995 2000 2005

GERD by government
32
Explanation of footnotes on country fiches:

1
For these countries, data on Real GERD (in Millions of 1995 PPS) were not available for the year 1995.
For these countries, data on Real GDP were not available for the year 1995.
For these countries, R&D intensities could not be computed for the year 1995, due to data availability
problems concerning Real GDP or Real GERD for the year 1995.
4
we have taken the data on real GERD for the EU15 average for 2003 instead of 2005.The percentage
5
The earliest available data on Eurostat are for 2002 which are used here.
6
This percentage change (in GERD) is not comparable with the percentage change in GDP as it refers to
a change between 2002-2005.

1
Because data were only marginally available before 2000, we used data of 2000 instead
2
For these countries, data on R&D personnel were not available for the year 2000.
4
5
For these countries, data on scientists and engineers were not available for the year 1998.
6
7
For these countries, data on graduates were not available for the year 1998.
8
33
5 Policy relevant findings

First of all one has to acknowledge the (interpretational) limitations directly related
to the limited data available (both time-wise and country-wise). Nevertheless, the
findings presented here are solid and in general supported and valued by the
consulted external experts. The main question that we have been dealing with is
how to interpret long term interrelations (co-evolutions) between GDP, R&D
expenditures and personnel?
We have made a strong endeavour to collect large numbers of data in order to

statistically support what is usually intuitively assumed: first of all, levels of R&D
spending are interrelated to the levels of economic growth and that growing R&D
expenditure levels might not always be adequately reflected in the R&D investment
intensities (the main indicator for measuring progress towards the 3% target);
secondly, public R&D expenditures positively affect the number of R&D personnel.
R&D intensities do temporarily depend on GDP growth patterns
The data show that R&D intensities in Europe are recently stagnating. When
distinguishing among the group of countries with relatively high GDP growth
patterns and the group with relatively low GDP growth patterns, we find that there
is significant difference in the average R&D intensities of the two groups (calculated
for the period 1981-2007), although this difference is rather small (equal to 0.2%).
What does this suggest?
This basically points out the limitations of our current basket of indicators to
monitor progress towards the Barcelona objective and the Lisbon agenda. The
evidence shows that R&D intensities (GERD and the like) are temporarily influenced
by the levels of GDP growth, which is expectable as GDP is the denominator in the
calculation of the R&D intensities. In other words, high levels of GDP (growth) in a
certain time frame may very well push the R&D intensity downwards (as GDP is the
denominator in the intensity calculation). The opposite is valid as well: in periods of
declining GDP growth R&D intensities may move upwards for a certain period of
time. This brings us to our following policy message.
A longitudinal approach seems more suitable for monitoring progress in

R&D and innovation expenditures
We did take the analysis a step further by also looking at whether there are
intrinsic mutual influences among these expenditure levels. GDP growth is likely to
correlate with R&D spending over time, albeit taking into account a certain time lag.
Instrumental to proving these assumptions has been a so-called co-integration
analysis (cf. part 2 of this report).
34
The results indicate that, for the countries for which this type of analysis could be
applied, real GDP and real R&D can help forecast each other with a one-year time
lag for Austria, Latvia, the Netherlands, Slovenia and Spain and with longer time
lags for Denmark, Finland and the US. To what extent this reflects budgeting
cycles and emphasis put on additional investments in R&D after periods of growth
cannot be answered here. But it is clear that time lags also touch upon governance
and policy making systems.
In view of the potential (temporal) fluctuation of the R&D intensity indicators due to
short term GDP evolutions, it may be appropriate to monitor R&D expenditure
levels over longer periods of time. This is particularly the case for countries that
show a higher volatility of GDP growth over time. Furthermore, it means that for
short term monitoring it would be appropriate to develop lower-level indicators that
react faster to short term developments.
Public expenditures on R&D and government performed R&D strengthen

the research base and capacity
As many scholars have pointed out R&D investments (an input parameter)
positively influence the research base of a country. This is also shown by our
analysis. We have considered the effect of government-performed R&D (in real
terms) on the research output proxied by the number of publications and the
number of patent applications for the EU27 countries. The effect of government-
performed R&D is significant and positive on the number of publications and patent
applications (the output side). R&D performed by the business sector positively
influences the number of patent applications, which could be expected as the
proximity to patent in the business sector is higher than for the public sector.
The effects of public R&D expenditures (as expressed by R&D performed by the
government and of the Government budget appropriation or outlays in R&D) on the
number of R&D personnel in the total employment population, is significant and
positive. Here we find a time lag of one year, suggesting that the immediate effect
of R&D expenditure on the number of R&D personnel occurs after one year. When
instead we use R&D performed by the government as the main explanatory variable,
we again find significant positive results on the number of R&D personnel.
Country specific monitoring and analysis seems necessary
As we have shown in the above discussed country specific fiches, the development
patterns of GDP and R&D differ strongly among countries. The evolution of GDP
versus R&D expenditures and R&D personnel depends on several structural
characteristics like governance structure, policy priorities, and systemic features
like industry and academic structures. Understanding R&D expenditure patterns
and performance, requires in depth knowledge of this characteristics. A one size
fits all approach seems too simplistic.
35
Future analysis based on longer time series could further investigate the main
research questions of this study and take them a step further. In particular, for the
first research question, more control variables as determinants of private R&D
should be included, such as variables on market competition and
internationalisation of R&D. Longer time series can also allow the creation of
dummy variables in order to isolate the effects for particular groups of countries
(e.g. catching-up economies, more industrialised countries, and so on). On the
second research question, the effect of public R&D could also be analysed on more
direct research-output measures such as the turnover of companies due to new or
improved products. Availability of data on wages of R&D personnel would also allow
for a more fundamental discussion on whether public R&D expenditures are partly
feeding into higher wages of researchers.
36
Part 2: TECHNICAL BACKGROUND
37
1 Literature Review
1.1 R&D expenditures and economic growth
1.1.1 Growth theory: an introduction
Economic growth is considered as one of the primary concerns of policy makers and
a fundamental driver of the economies. As such, a lot of effort has been devoted in
the examination of the drivers of economic growth.
The literature on growth theory can be divided into three main categories (see also
Evenson, 1997):
The Harrod-Domar growth models: this literature has emphasised the

importance of savings and investment for economic growth.
The neo-classical models of economic growth have identified

technical progress as a key determinant of economic growth, however
assuming that technical change is an exogenous factor.
The new growth theory or endogenous growth theory has

emphasised the role of R&D, human capital accumulation and externalities
as determinants of economic growth. The Schumpeterian growth models
for example emphasise on the importance of the distance of the
economies to the technology frontier.
The Harrod-Domar models (developed by Roy F. Harrod in 1939 and Evsey Domar
in 1946) explain the rate of growth by the level of saving and the productivity of
capital. This model acted as the precursor to the exogenous neo-classical growth
model (e.g. the Solow model).
According to the neoclassical view on growth (pioneered by the work of Solow in

1957), the production function, providing the relationship between production
output and variable levels of input factors, is used to determine the rate of growth.
In this relationship, the rate of growth is determined exogenously in the production
function2. This implies that there is no explanation of what causes technical change;
this is the so-called Solow-residual, namely that part of growth that cannot be
explained through capital accumulation. In view of this, empirical studies found that
the rate of technical progress (as defined by the Solow model) measured as the
2 The main differences in assumptions of the Solow-model to the Harrod-Domar model are:
Labour was added as a factor of production.
It is assumed that there are diminishing returns to labour and capital separately, and
constant returns to scale for both factors combined.
A time-varying technology variable has been introduced (independent of capital and labour).
The demand side was excluded as a separate determinant of growth neo-classical models
are supply-driven.
38
growth of Total Factor Productivity 3 explained most of the long-term growth of

industrial economies (e.g. Jorgenson and Griliches, 1967). During the 1970s,
technological progress took the form of more radical technical changes creating the
Solow paradox as radical technical change could not be explained via the
production function (given the assumption that technology is depicted through TFP).
Reflecting on this so-called paradox, the literature started introducing endogenous

elements of capital in the production function leading to a new wave of literature on
economic growth: the new growth or endogenous growth theory. In what follows
we focus on the findings of the literature on endogenous growth theory.
1.1.2 Endogenous growth: the effect of R&D and spillovers
In general, endogenous growth theory has followed the neoclassical growth models
in order to overcome a shortcoming: long-run growth has been assumed exogenous
resulting in the savings rate or the rate of technological growth remaining
unexplained. Endogenous growth theory, however, builds on macroeconomic
modelling based also on microeconomic considerations. Households are assumed to
maximise their utility subject to budget constraints and firms maximise profits. New
technologies and human capital play a crucial role in these models. The production
function can take the form of a simple AK model (constant-return-to-scale
production function) or more complicated models that include spillover effects,
human capital accumulation, increasing number of products, and so on.
In terms of policy implications, the endogenous growth models assume in general

that the long-term growth rate depends on the savings / investment rates. This
implies that public policy that increases the savings rate can have an impact on the
growth of the economies (e.g. subsidies on R&D, investments in education, etc.).
The main element of the endogenous growth theory is that the growth rate of GDP
is endogenous. This literature assumes that production is not only explained by
tangible elements of capital (physical capital like buildings, and equipment) but
also by human capital and intangible capital such as R&D.
New growth theory has been pioneered by the articles of Romer and Lucas in the
early and mid-1980s (although some elements of new growth theory date back to
Joseph Schumpeter). The introduction of R&D (and also indirectly knowledge) is
crucial for the new-growth-theory models. R&D not only creates profit for those
that invest in R&D, it also benefits also other actors in the economy. This takes the
form of spillover effects of the knowledge/ information/ know-how that is developed
and can benefit also others (Romer, 1990; Barro and Sala-i-Martin, 1995). In other
words, R&D is not fully-appropriable.
3 Total Factor Productivity addresses effects in total output which are not caused by inputs or economies
of scale.
39
The effect of R&D spillovers on productivity was examined in broad terms by Coe
and Helpman (1993). They looked at the relationship between total factor
productivity and (domestic and foreign) R&D capital stock in 22 industrial
economies in the period 1971-1990. Their findings indicated that accumulated
spending on R&D by a country and its trade partners led to increases in the growth
of total factor productivity. This also indicates that R&D spillovers do have an effect.
Including also sectoral-level data on a sample including 11 OECD countries,
Evenson and Englander (1993) studied the same question. They found that the
impact of foreign R&D stock was relatively low for the (technology) leader country
in which less R&D-related knowledge was diffused. In general, the relative
technology position among different countries receiving R&D spillovers is
important. Countries with relatively less developed technologies could benefit more
from R&D spillovers from countries closer to the technology frontier. However, the
degree to which the technology-laggards can benefit from these spillovers
depended to a great extent on the technological capabilities that these countries
already possess, which enables them to make use and benefit from the incoming
technology spillovers (Cohen and Levinthal, 1989).
1.1.3 The determinants of R&D
1.1.3.1 R&D and GDP (growth)
R&D activity is regarded as the input into the innovation process with outputs being
innovative activities. It is a long-term capital investment that cannot be adjusted
easily through time. However, there is also a short-term component of R&D activity
linked to the business cycle: for example, the world-wide recession of the early
1990s, was followed by a decline in R&D expenditures in most of the OECD
countries, although these had been increasing in previous periods (see Heger,
2004). Schmookler (1966) indicated that innovative activity depends on market
demand following the fluctuations in economic activity): this is referred to as the
demand-pull approach4. This approach suggests that the patterns followed by
R&D activities can reflect the business cycle. The supply- (or technology-)push
approach supports that sees structural innovations, through offering new
opportunities in the economy, as able to bring an end to a recession (see
Schumpeter, 1939; Kleinknecht, 1990).
There have been several studies supporting either the demand-pull or the
technology-push approach. Kleinknecht and Verspagen (1990) support the view
that demand-pull and technology-push effects might be complementary rather than
mutually exclusive. This is supported by the neo-Schumpeterian literature
suggesting that the industry stage and the type of innovation can determine the
4 Schmookler was originally referring to the median / long run impact of demand. Hence, the
interpretation of his demand-pull effect as basically a short run (fluctuation of economic activity)
might be derived from the originally meaning as an application to short run demand fluctuations.
40
relative weights of the demand-pull and the technology-push effects, with the
technology-push effect being considered as more important for innovative
breakthroughs, and the demand-pull effect being expected to be more important
for subsequent innovations (see for more details, Heger, 2004).
Heger (2004) tests empirically whether the entrepreneurial decision to innovate is

influenced by the business cycle for German manufacturing companies in 1993-
2000 and finds that there are both pro- and counter-cyclical patterns of business
innovative activities.
According to statistical evidence and case studies, R&D expenditures are financed
primarily by the firms cash flow (Hall, 1992; Himmelberg and Petersen, 1994). This
is mainly due to the fact that firms can have only limited external funding, at best,
for their R&D projects, owing to high riskiness of projects and/ or difficulty for the
investors to identify the value of the project. Cash-flow is described as pro-cyclical,
as it is generated by the current activities of the firm; as such R&D expenditure
tends to be pro-cyclical too (see also Guellec and Ioannidis, 1997). On the other
hand there are also reasons why R&D expenditure should not be expected to
respond to fluctuations of economic activity. For example, R&D is a sunk cost
entailing a high perceived cost when a project stops (see Sutton, 1991, for an
overview of the theoretical considerations on sunk costs).
The literature does not provide a clear conclusion on what relationship should be
expected between R&D and the business cycle. Hall and Mairesse (1995) using
microeconomic panel data find support for the pro-cyclical arguments on R&D.
Geroski and Walters (1995) using macroeconomic evidence find a pro-cyclical
behaviour of innovation and patents in the UK during 1948-83. However, Saint-Paul
(1993) does not find any relationship between short-term fluctuations of GDP and
R&D in OECD economies.
1.1.3.2 Financial resources
R&D expenditure (and especially that part related to business R&D) depends to a
large extent on the availability of internal and external financing opportunities. As
already mentioned before, internal financing possibilities are of particular
importance as external financing is often difficult to find. For relatively small firms
with restricted financial means (mainly SMEs) the availability of venture capital (VC)
financing is crucial here. However we should note that the amount of VC financing
for R&D is extremely small in EU countries. The importance of venture capital might
prove to be an important source of financing R&D for early stage firms in some
selected sectors (e.g. biotech).
41
1.1.3.3 Market regulations
According to Jaumotte and Pain (2005) the effects of market (product and labour)
regulations can affect R&D expenditures; however the results of the literature are
ambiguous.
A competitive product market gives incentives to innovate and increase the gap
with the competitors, but this is expected to be the case only up to a point, after
this the diminishing returns that appear reduce this effect. There is also a link
between competition and R&D (e.g. within the line of Aghion-type of models (see
Aghion and Howitt, 1998)). Increased competition (or expected increases in
competition (due to inward FDI, etc.)) may stimulate R&D investment of domestic
firms.
EPL (Employment Protection Legislation) could have a two-directional effect on

incentives to innovate: a negative effect as firms are discouraged to undertake
innovation-driven reorganisations of the workforce and a positive effect as it might
encourage firms to invest in (incremental) process innovations as a result of the
specialisation of the workforce (Jaumotte and Pain, 2005).
Restrictions on inward FDI can also have a twofold impact: on the one hand, they
can decrease the opportunities for knowledge spillovers foreign companies; on the
other hand, they can be expected to give more space to national companies to
innovate (Jaumotte and Pain, 2005).
The degree of intellectual property right (IPR) protection in countries is also

expected to affect the incentives of firms to innovate. The literature (Jaumotte and
Pain, 2005) indicates that the relationship between the IP system and innovative
activity is not straightforward. On the one hand, strong IPR systems can encourage
firms to innovate as the risk of unintended knowledge spillovers to competitors is
low. On the other hand, strong IPR systems imply that the firms that innovate have
restricted access to spillovers for other companies/ actors in the economy.
Especially insofar as multinationals are concerned (multinationals through their
affiliates are considered as contributing to a significant extent to the diffusion of
knowledge and know-how in the local economies) studies have found that they are
particularly responsive to the strength of the IPR systems in foreign countries. In
particular, they seem to reserve knowledge intensive and higher value-added
activities for countries with stronger IPR regimes (Lee and Mansfield, 1996;
Smarzynska, 2004).
The above-mentioned factors might be useful to explain structural differences

between countries in R&D intensity or change in medium-term and long-term R&D
growth. But they are not likely to be an important determinant of short term
fluctuations in R&D expenditures.
42
1.1.3.4 STI Resources
The importance of STI (Science, Technology and Innovation) resources in the

country should be taken into account in discussing the determinants of R&D. The
effects of the STI base of a country is two-fold: on the one hand STI resources are
expected to be positively related to the R&D expenditure itself, as more scientists
can produce more innovative output; on the other hand, more STI resources
increase the absorptive capacity of the economy allowing for a more efficient use
of external knowledge coming into the county (Cohen and Levinthal, 1989).
According to the literature (Jaumotte and Pain, 2005) the number of scientists and
engineers in a country is a factor that affects R&D activities. There is a dual effect
here as implied also in the previous paragraph. Differences among countries in
relation to R&D spending can be to some extent explained by differences in the
total amount of scientists and engineers. At the same time the number of scientists
and engineers increases the absorptive capacity of the economy and therefore
increases (potential) R&D activities.
The patenting activity in a country has also been identified in the literature as a
factor affecting R&D activities (e.g. Jaumotte and Pain, 2005). In this case however
long time lags should be considered as it seems likely that there is time needed
between the time when the research is undertaken and when the patent is granted.
Jaumotte and Pain (2005) using a data set of 19 OECD countries in the period
1986-2000, find that there is a link between R&D and subsequent patenting.
1.2 The effects of Public R&D expenditures

This section provides a short overview of the main literature on the effects of public
spending on R&D. The second part of this section particularly focuses on the effects
of public R&D spending on the research base of the countries.
1.2.1 Rationale for Public R&D
Over 80 billion euros (at current prices) were spent in the EU27 on publicly funded
R&D (measured by GBAORD - Government Budget Appropriation or Outlays for
R&D) in 2005. Around four fifths of this amount is found to be spent in five EU
countries: Germany, France, the United Kingdom, Italy and Spain. The rationale
for government spending on R&D stems mainly from the existence of market
failures characterising the R&D process:
1. Imperfect appropriability of R&D results: this is related to the unintended

knowledge spillovers that follow after the output of R&D is being realised
(e.g. an invention).
43
2. High risk of research: the relatively high risk of R&D activities and research
create disincentives for the private sector in relation to performing R&D,
which can be more evident among small firms with limited financial
resources.
Mainly because of such market failures, firms in a competitive market are expected
to invest less in R&D than the socially optimal level (see Arrow, 1962). In order to
respond to these market failures, governments spend on R&D through public
funding and the provision of incentives for undertaking R&D for the private sector,
e.g. through:
Direct policy measures: mainly grants, subsidies and loans, public

procurements and public funding of research performed in higher-education
institutions (universities and public research institutions);
Indirect support to R&D: mainly including fiscal measures encouraging firms

to undertake R&D through tax credits (we should perhaps note here that the
cost to the government of tax incentives are not included in the usual R&D
statistics).
The main difference between direct and indirect measures that support R&D is
found in the following: direct measures (e.g. subsidies) increase the private rate of
return from R&D while indirect measures e.g. tax credits) reduce the marginal cost
of R&D. Also, a tax credit does not affect the choice of R&D projects that a firm will
undertake, while a subsidy does (see David et al, 2000).
1.2.2 Effects of Public R&D
1.2.2.1 Public R&D and the business sector
Public R&D is mainly performed in two ways: by universities (Higher-Education

Expenditure on R&D, HERD) and by public research institutes (Government
Expenditures on R&D, GOVERD). The literature has analysed the effect of public
R&D expenditure. Guellec and Van Pottelsberghe (2003) examine the effect of
government funding on business R&D in 17 OECD Member countries during the 80s
and the 90s. They find that the effect of government funding depends on its level
as it varies with respect to its generosity: it increases up to a certain threshold
(about 10% of business R&D) and then decreases beyond that point. Also, other
studies indicate that public R&D expenditure can be complementary to private R&D
(e.g. European Commission, 20035; Reinthaler and Wolff, 2004; Falk, 2006).
5 For example, the estimated effects of public R&D expenditure on private R&D expenditure by the
European Commission are exceptionally high: one additional euro spent on R&D by universities
leads to an additional 1.3 euros in R&D expenditure by businesses and one additional euro of R&D
expenditure by research institutes results in an additional 1.1 euros of R&D expenditure by the
private sector.
44
The effects of public research (being a part of public R&D) have been examined by
several studies distinguishing among private and social rate of return from public
and industrial R&D. According to Martin (2007) the social rate of return on
industrial R&D is 40-60% and is approximately double the private return (20-30%).
The rate of return to publicly-funded R&D according to the literature is found to be
20-50% (see also Martin, 2007).
The impact of research (being a part of public R&D) has been examined by the
literature focusing on different dimensions of these effects. Mansfield (1991)
through a survey of industrial R&D managers examined the impact of academic
research on innovations of firms. He finds that around 10% of innovations would
have been delayed and around 2% of innovations would have not been performed
in the absence of academic research. Narin et al. (1997) found an increasing
dependence of patents on results of publicly funded basic research, indicating
increasing science-technology links, though differences are expected among
different sectors.
The effect of spillovers has been increasingly studied in the literature on the effects
of public research. For example, Griliches (1995) and Jaffe (1989) show that
research produces geographical and inter-sectoral spillovers. The geographical
spillovers are linked to effects of location while inter-sectoral spillovers refer mainly
to the networking and inter-personal relations that are created from managers
across sectors. Spillovers of research have been considered as resulting in
agglomeration effects, e.g. Silicon Valley (see Feldman and Florida, 1994).
Spillovers are also considered as an important factor that drives growth in the new
growth theory (Romer, 1994; Grossman and Helpman, 1991).
1.2.2.2 Public R&D and the research base
Measuring the effects of public R&D (or publicly funded research) proves to be
difficult due to some intrinsic characteristics of research. For example, as already
mentioned, the attribution problem refers to the fact that the not all the benefits of
research can be attributed to initial research activities or other research inputs (e.g.
trial-and-error, organisational improvements provide benefits which are often not
attributed to the research input). The causality problem is another issue to be taken
into account when analysing the effects of research (and therefore also publicly
funded research), reflecting the interrelations among the different parts of R&D
(research, technological development, innovation, the broader economic
environment), which impedes the process of attributing benefits to their causes. In
addition, the internationalisation of R&D activities and the interaction of research
inputs among several countries challenge the measurement of the benefits from
research as further problems of attribution arise.
45
However the literature has attempted to measure the benefits realised as a

consequence of public research. Martin et al (1996) have identified the main types
of benefits from publicly funded research and categorised them as follows.
a. increasing the stock of useful knowledge
The research conducted by publicly-funded institutions is to a large extent basic

research that does not always lead to final products and applications. The results of
the production of this research however are important for the actors of the
economy that can use this knowledge for their own research and in view of the
commercialisation of their applications. Basic research therefore increases the
knowledge base available to companies and other actors in the economy and
therefore increases their ability to source external information. Rosenberg and
Nelson (1994) find that publicly-funded research does not substitute industrial R&D
but instead, it stimulates industrial R&D, i.e. crowding-in. Klevorick et al (1995)
suggest that publicly funded R&D increases the opportunities of the industry to
engage in R&D. Publications resulting from publicly funded research also expand
the opportunities of companies to access this stock of knowledge (Dasgupta and
David, 1994).
b. training skilled graduates
Publicly-funded research involves the employment of research assistants and

students, turning them into skilled graduates that are likely to be hired by
companies. Trained graduates possess useful tacit knowledge that can be used in
the industrial sector, and at the same time can be better prepared to be benefited
from training programmes and better placed to acquire more industry-specific skills
(Senker, 1995).
c. creating new scientific instrumentation and methodologies
Basic research often results in the discovery of new techniques, methodologies and
instruments that are essential for the production of applications. New
instrumentation that results from basic research can be used by scientists to
expand their research but even to introduce new fields of research, e.g. artificial
intelligence (see von Hippel, 1987; Rosenberg, 1992). Studies in this field of
research shows that companies are found to license mainly research tools and
techniques from the universities and that they consider instrumentation as one of
the most important outputs of public research (see for example Nelson et al, 1996;
Arundel et al, 1995).
d. forming networks and stimulating social interaction
Public funding often provides the means for academics and the industry to
participate in world-wide research/scientific communities. Although the benefits
(economic and technological) of these activities are not easy to measure, the
literature has studied the effects of such activities in the research and industrial
communities. For example, contact between the industrial and the research sector
are considered significant for successful collaborations between these two sectors
46
(e.g. in Faulkner and Senker, 1995 on the public-private linkages in biotechnology,

engineering ceramics and parallel computing). A survey of European firms by
Caloghirou and Vonotras (2002) has pointed out that the formation of Research
Joint Ventures benefits the companies in terms of: the acquisition and creation of
new knowledge, development of new products, improvement of technological and
organisational capabilities, and continuation/ acceleration of existing research.
e. increasing the capacity for scientific and technological problem-solving
The innovation potential and the research outputs of the industry in technology-
intensive sectors depend largely on the combination of different technologies,
techniques and methodologies. Public research provides adequate resources so that
companies can realise their research potential (Patel and Pavitt, 1995). The
acquisition of technical knowledge and the innovative activities within certain
scientific fields can largely depend on the outcomes of the fundamental research
carried out in different or neighbouring scientific fields, like engineering and
mathematics or physics (Rosenberg and Nelson, 1994).
f. creation of new firms
Although a geographical concentration of new firms and spin-off companies has

been noticed around research-intensive universities, institutions (e.g. around MIT in
USA or IMEC in Belgium), the literature does not provide evidence that public
funded research has in general a positive impact on the generation of spin-offs,
although for particular sectors such as electronic-equipment, there is such evidence
provided (Bania et al, 1993). The localisation of new small companies in science
parks around universities has been found to be favourable, however of limited
effectiveness (Storey and Tether, 1998).
47
2 Feasibility study
2.1 The conceptual framework

In the following section, we provide the conceptual framework that has been used
throughout the various analyses.
The analysis starts with the production of statistics on the evolution of R&D
expenditures and GDP in the EU-27, benchmarking with the US and Japan,
according to data availability. In a second stage the analysis focuses on a subset of
the EU countries (already defined in the proposal) and the USA and Japan
(according to data availability) and proceeds with regression analysis focusing on a)
the determinants of R&D and the relationship with GDP and GDP growth and on b)
the relationship between public R&D expenditure and the research base. Figure 4
describes the main elements that the literature review has identified as important
elements affecting levels of public and private R&D.
Figure 4: Conceptual Framework
Source: IDEA Consult
The general macroeconomic environment affects R&D expenditure directly and

indirectly. The direct effect stems from the position of the economy in the business
cycle, the situation on the financial markets and the financial resources available to
both the public and the private sector. R&D expenditures are assumed to have an
influence on (and be influenced by the) the general macroeconomic conditions,
albeit taking into account a certain time lag. As an indirect effect of the
macroeconomic environment, market regulations as well as public policies for the
promotion of R&D, affect the performance of the public and the private sector. The
STI resources in the country also directly influence the R&D expenditures as input
to the entire STI process; in turn, however, investment in R&D feeds back into the
STI resources of a certain country.
48
This conceptual framework provides the basis for the developed analytical model.
In what follows, we provide a list of indicators as proxies of the various elements
and dimensions of the conceptual framework.
2.2 Collection of Indicators
Based on the conceptual framework, the following indicators have been collected:
Data on macro-economic conditions:

o GDP (in nominal and real terms)
o GDP growth
Financial market and financial resources:
o Real interest rate
o Venture capital
Market regulations:
o Labour market regulations: Employment Protection Legislation (EPL)
o Restrictions on inward FDI
o IPR system
STI resources:
o Research input (human resources in R&D)
R&D personnel
Scientists and engineers
Number of graduates
Number of researchers
o Research output
Publications
Patenting activity
Public policies:
o Public R&D expenditures (also as percentage of GDP) in real terms,
split up (if appropriate) between
Government-sector expenditures on R&D (GOVERD), and
Higher-education sector expenditures on R&D (HERD)
Government budget appropriation or outlays for R&D
(GBAORD)
R&D expenditure:
o Gross R&D expenditures (GERD) and percentage of GERD in GDP (by
sources of financing)
o Business Enterprise R&D expenditures (BERD) and percentage of
BERD on GDP
A detailed list of the indicators collected with their definition, their time dimension,
the country coverage and the data sources is provided in Annex 1. All indicators are
collected per country for all the EU27 countries and for the US and Japan for the
years 1980-2005. The availability of data (both time-wise and country-wise)
49
however implies clear limitations for both the statistical and the econometric
analysis6.
2.3 Data analysis strategy
2.3.1 Data sources used

In view of the time frame of this assignment, already existing data sources have
been used for the data collection in order to avoid the involvement of National
Statistical Offices in the phase of data collection. For the purposes of this study, the
following sources have been screened and used according to the availability of data:
Eurostat
OECD
The Rindicate Database 7
Eurostat data were used for the majority of the analyses. Where needed, Eurostat
data have been complemented with OECD data (STI). From the Rindicate database
we have used the data on publication performance, being the number of scientific
articles. Annex 1 provides a description of the data collected for the main variables.
2.3.2 Data coverage and analysis

The time coverage has included all data available from 1980 until 2008 (the latter
year based on estimations). However, this range of data is not available for all
countries to the same extent. The available data over time necessitates that, in
order to be able to produce comparable results across the EU27 countries, the data
for the statistical analyses to be limited to period 1995-2005; this in order to be
able to cover to the extent possible all EU27 countries. This applies also to
econometric analyses. Specifically for the econometric analyses, in order to provide
results for the EU27, US and Japan we have employed a panel data analysis
approach which provides estimation results based on the collective data patterns of
all EU27 countries, US and Japan (i.e. combination of observations).
Initially, the country specific analyses and regressions where focussing on the
following countries:
France, Germany, the UK, Spain, Austria, Italy, Ireland, the Netherlands,
Greece (EU15 countries)
Denmark and Finland (two Nordic countries)
Slovenia, Latvia and Poland (new Member States)
6 All data collected in the course of this project will be made available to the Commission in electronic
form.
7 Rindicate Assignment 1 The role of S&T for Catching-Up economies final report delivered to the EC.
50
However, given the missing data for certain countries, for certain variables, and for
certain years, and in order to maximise the statistical power of the testing
procedure and its results, we have decided to extend the country coverage of the
analysis to all EU27 countries, plus the US and Japan. In order to distinguish among
new Member States and old Member States, we have constructed a dummy
variable in our sample to be used where appropriate.
In function of the research objectives, we first provide a set of more general

descriptive statistics followed by a set of statistical testing procedures (including the
panel data regressions and estimations). The panel data approach is preferred
given the fact that our analysis includes both a time and a country dimension,
which makes the technique applicable and useful. It combines all information for all
countries available which significantly increases the explanatory power of our
statistical model.
2.4 Expert involvement and validation

In order to increase the credibility of this study and in order to better interpret the
main findings, we have approached a number of experts in the area of R&D
investments and economic growth, and R&D statistics (in-depth survey). The main
objective of the survey has been to create the opportunity for the (further)
discussion of the results of the empirical analyses. Two types of experts were
approached:
Researchers (from Universities or other Research Institutes)
Policy makers
The experts, 26 in total, have been contacted via email about the study and have
been invited to comment on the basis of a report containing the main results. More
precisely, the experts have been asked to comment on the general approach and
the (policy) implications of the main findings. Many experts however were not
available for an interview.
The following experts have provided their comments (either via the telephone or via
email).
Table 1: Consulted experts
Name Organisation
Dominique GUELLEC OECD
Hugo ERKEN Ministry of Economic Affairs in the Netherlands
Nick VON TUNZELMAN SPRU, University of Sussex, UK
Piet DONSELAAR Ministry of Economic Affairs in the Netherlands
Philip SHAPIRA Manchester University (UK) and Georgia Institute of
Technology (USA)
Evanthia SCHMIDT Aarhus University, Denmark
Gonzalo LEN Polytechnic University of Madrid, Spain
51
Antoine SCHOEN ESIEE Engineering, France

Andreas REINSTALLER WIFO, Austria
Kai HUSSO Ministry of Employment and the Economy, Finland
Maja BUCAR University of Ljubljana, Slovenia
The suggestions and comments of these experts have been integrated as much as
possible in the underlying report, and mainly into the country fiches.
52
3 The co-evolution of GDP and R&D
3.1 Descriptive Statistics
3.1.1 R&D intensity in the EU
The EU is lagging behind the US and Japan in terms of R&D intensity: the R&D
intensity in the EU27 countries amounted to 1.84% on average in 2005, compared
to 2.61% in Japan and 3.32% in the US. Figure 5 compares the R&D intensities (i.e.
the ratio of Gross Expenditures on R&D (GERD) over GDP) in all EU27 countries,
with the US and Japan in 2005. In the following graph we have used data in 2005
as data for GERD in 2006 are not available for Japan in Eurostat.
Figure 5: R&D intensity (GERD as % of GDP), 2005
Sweden 3,8
Finland 3,48
Japan 3,32
US 2,61
Germany 2,48
Denmark 2,45
Austria 2,43
France 2,12
EU15 1,9
EU27 1,84
Belgium 1,84
UK 1,76
Netherlands 1,74
Luxem bourg 1,57
Slovenia 1,46
Czech Republic 1,41
Ireland 1,26
Spain 1,12
Italy 1,09
Hungary 0,94
Estonia 0,93
Portugal 0,81
Lithuania 0,76
Greece 0,58
Poland 0,57
Latvia 0,56
Malta 0,54
Slovakia 0,51
Bulgaria 0,49
Romania 0,41
Cyprus 0,4
0 1 2 3 4
%
Source: Eurostat
53
Figure 5 shows that there is a large heterogeneity within the EU27 countries
8
concerning R&D intensities.
Sweden and Finland cap the rankings and invest more than 3% of their GDP in
R&D.
Germany, Denmark, Austria and France also perform above average levels and
show R&D expenditures over 2% of GDP.
The Mediterranean countries and the new Member states however, show R&D
intensities of below 1.5% of GDP. Within this group there are large differences,
with R&D intensities ranging from 1.46% (Slovenia) to 0.4% (Cyprus).
Figure 5 gives a static picture of R&D intensity in 2005 across the EU countries.
Figure 6 instead provides an overview of the evolution of R&D expenditure as a
percentage of GDP over time (1995-2005). Again, as explained in the previous
section due to lack of data availability on GERD we limit our analysis to the period
1995-2005.
Figure 6: R&D intensity among the Triad regions (GERD as % of GDP), 1995-2005
3,6
R&D Intensity (GERD as % of GDP)
3,4
3,2
3
2,8
2,6
2,4
2,2
2
1,8
1,6
1,4
1,2
1
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: Eurostat
According to Figure 6:
Between 1995 and 2005, the US and Japan have systematically outperformed
the EU27 regarding R&D intensity.
During that decade, the R&D intensity in the EU (15 and 27 Member States)
grew very slowly in the second half of the 1990s.
Since 2001, the EUs R&D intensity has stagnated and even dropped somewhat.
8 The heterogeneity within the US is quite similar. However, even the States with low R&D intensity
show higher R&D intensity than EU members with low R&D intensity (see van Pottelsberghe, 2008).
Hence, heterogeneity is not the main issue to be analysed here.
54
The gap between the EU and Japan has increased over time, as R&D intensities
in Japan have expanded considerably between 1995 and 2005.
In the US, the R&D expenditures as a proportion of GDP increased from the
mid-1990s until 2001.
A temporary drop occurred in 2002 and 2004, but in 2005, the R&D intensity in
the US again increased in comparison to 2004. Thus, the R&D investment gap
between the US and the EU remained unchanged.
In summary we see that:
There is a large heterogeneity within the EU27 countries concerning R&D
intensities.
Between 1995 and 2005, the US and Japan have continuously outperformed the
EU regarding R&D intensities.
Since 2001, the EUs R&D intensity has stagnated and even dropped somewhat.
3.1.2 Co-evolution of GDP and GERD: Changes in GERD and

GDP
Table 2 gives an overview of the changes in real gross R&D expenditures (GERD
expressed in millions of Purchasing Power Standards in 1995 Prices), real GDP and
R&D intensities between 1995 and 2005 in the EU27 countries, the US and Japan.
Box 3: Purchasing Power Parities (PPPs) and Purchasing Power Standards (PPS)
Purchasing Power Standards (PPS) are a fictive 'currency' unit that eliminates differences
in purchasing power, i.e. different price levels, between countries. Thus, the same
nominal aggregate in two countries with different price levels may result in different
amounts of purchasing power. Figures expressed in Purchasing Power Standards are
derived from figures expressed in national currency by using Purchasing Power Parities
(PPP) as conversion factors. These parities are obtained as a weighted average of
relative price ratios in respect to a homogeneous basket of goods and services, both
comparable and representative for each country. They are fixed in a way that makes the
average purchasing power of one Euro in the European Union equal to one PPS.
Source: Eurostat Structural Indicators metadata
55
Table 2: Gross R&D Expenditures, Real GDP and R&D intensities: 1995 and 2005
Gross Expenditures on R&D
Gross Domestic Product GERD/GDP ratio
(GERD)
% % %
1995 2005 1995 2005 1995 2005
Austria 2430 4775 96 179137 225483 26 1,54 2,43 58
Belgium 3195 4350 36 220293 272334 24 1,67 1,84 10
Denmark 1839 3038 65 150803 184794 23 1,82 2,45 35
Finland 1826 4012 120 104781 149810 43 2,26 3,48 54
France 23091 26746 16 1255031 1565465 25 2,29 2,12 -7
Germany 33804 43564 29 1867388 2122106 14 2,19 2,48 13
Greece 508 1000 97 116419 170799 47 0,43 0,58 35
Ireland 685 1400 104 65802 136720 108 1,26 1,26 0
Italy 9827 12645 29 1084023 1243525 15 0,97 1,09 12

Luxembo
340 16338 26409 62 1,57
urg1,3
Netherlan
5513 6305 14 342776 443937 30 1,97 1,74 -12
ds
Portugal 596 1132 90 100094 127711 28 0,54 0,81 50
Spain 4204 8533 103 515405 740129 44 0,79 1,12 42
Sweden 5318 8239 55 226075 302254 34 3,28 3,8 16

United
18409 22048 20 1343023 1776388 32 1,94 1,76 -9
Kingdom
EU15 113397 1452794 28 7603985 9490610 25 1,85 1,9 3
Bulgaria 243 237 -2 14285 17731 24 0,62 0,49 -21
Cyprus 1,3 48 8358 11811 41 0,4

Czech
1061 2035 92 57128 73886 29 0,95 1,41 48
Republic
Estonia 1,3 141 4552 9076 99 0,93
Hungary 562 1084 93 42730 64216 50 0,73 0,94 29
Latvia 54 123 129 6527 12592 93 0,47 0,56 19
Lithuania 81 254 214 9835 18010 83 0,44 0,76 73
Malta1,2,3 34 4409 0,54
Poland 1523 2068 36 142685 216169 52 0,63 0,57 -10

Romania1,
2,3 523 53322 0,41
Slovakia 346 284 -18 18651 28012 50 0,92 0,51 -45
Slovenia 331 462 40 17105 25249 48 1,55 1,46 -6
EU271 1408045 114891 -186 7972659 10028033 26 1,81 1,84 2
Japan 69326 88447 28 4817346 5396222 12 2,92 3,32 14
US 154414 221825 44 8696081 11898549 37 2,49 2,61 5
Source: Eurostat
1
For these countries, data on Real GERD (in Millions of 1995 PPS) were not available for the year 1995.
For these countries, data on Real GDP were not available for the year 1995.
For these countries, R&D intensities could not be computed for the year 1995, due to data availability
problems concerning Real GDP or Real GERD for the year 1995.
4
we have taken the data on real GERD for the EU15 average for 2003 instead of 2005.The percentage
5
The earliest available data on Eurostat are for 2002 which are used here.
6
This percentage change (in GERD) is not comparable with the percentage change in GDP as it refers to
a change between 2002-2005.
56
Within the EU15 countries, Ireland, Finland and Spain are characterized by a
doubling of their real R&D expenditures between 1995 and 2005. Finland and
Spain have also experienced considerable growth in their R&D intensities during
the same decade.
Only in the case of Ireland has the increase in R&D expenditures been offset by
a larger increase in GDP, leading to an unchanged R&D intensity in Ireland.
Also Austria, Greece and Portugal can be considered as countries which can be
described by high growth rates in real R&D expenditures and R&D intensities.
When comparing the EU15 to Japan and the US, we may notice that real R&D
expenditures in the EU15 have increased at a similar growth rate as in Japan
and that the changes in real GERD in the US have outpaced those in the EU and
Japan for the period 1995-2005. If we take a closer look at R&D intensities, we
see that the growth in R&D intensity in Japan has been mainly caused by a
relatively low growth in GDP (compared to EU15 and US) over the period
considered.
Within the new Member States of the EU, especially Latvia, Lithuania, Hungary
and the Czech Republic especially stand out for their good performance in real
R&D expenditures. In all of these countries, real GERD approximately doubled
and it increased by even more than 200% in Lithuania. R&D intensities of these
countries were also subject to relatively high growth rate. Poland and Slovenia
also saw an increase in their real R&D expenditures, but these were offset by
high real GDP growths, leading to decreased R&D intensities. Finally, Slovakia
and Bulgarias R&D expenditures decreased from the mid 1990s until the mid
2000s.
What can be said however about R&D intensity in the EU? Is the flattening of R&D
intensity in the EU due to stagnating R&D expenditures or to high GDP growth rates
in most of the Unions Member States? Figure 7 gives a first indication of an answer
to this question. This figure presents real growth in GERD and GDP between 1995
and 20059. A 45 degree line has been added to the graph, to assist in deriving the
following interpretation: countries situated below this line have experienced higher
GDP growth than growth in R&D expenditures; countries situated above the line
have experienced lower growth in GDP than in GERD. If a large proportion of EU
Member States lies below the 45 degree line, this would indicate that the
stagnating R&D intensity in the EU coexists with a higher real GDP growth. We
should note that this graph shows the relative change in GERD with respect to the
relative change in GDP for the period 1995-2005, it however does not investigate
the relationship between GDP growth and GERD growth.
9
The numbers in this graph are the same as in Table 2.
57
Figure 7: Real GDP Growth and Real Growth in GERD between 1995-20051,2,3,4
250
LT
200
Real Growth in GE RD 1995-2005
150
LV
FI
ES IE
100 ATCZ EL HU
PT
DK
SE
50
US SI PL
BE
DE
JPIT EU15
FR NLUK
0 BG
0 20 40 SK 60 80 100 120
-50
Real GDP Growth 1995-2005
Source: Eurostat
1
For Luxembourg, Cyprus, Estonia, Malta, Romania and EU27 average: data on Real GERD (in Millions of
1995 PPS) are not available for the year 1995.
For Malta and Romania: data on Real GDP were not available for the year 1995.
4
we have taken the data on real GERD for the EU15 average for 2003 instead of 2005. The percentage
The graph shows that only a small share of EU countries lie below the 45 degree
line, which shows that only in a relatively limited number of EU Member States, was
real GDP growth higher than real growth in R&D expenditures.
In most countries, real GDP growth was smaller than real GERD growth. This
observation suggests that the levelling-off of the R&D intensity curve in the EU
does not coexist with higher GDP growth in most of the Unions Member States,
which is confirmed by the fact that the EU15 average is situated just above the
45 degree line; however this finding has to be statistically tested.
A final remark we can make about this graph is that the new Member States
included in the graph 10 are split evenly across the 45 degree line. Thus, the
stagnation of R&D intensities in the EU is not exclusively an effect of higher GDP
growth rates (relative to the R&D expenditure growth rates) in the new Member
States. However, here we should take into account that the new Member States
10
New Member States are indicated in RED in Figure 7.
58
represent only 2% of the total R&D expenditure, implying that their impact on
EU-level R&D is very limited.

There is a large heterogeneity within the EU27 countries concerning R&D intensities
(as already pointed out).
Within the EU15, Ireland, Finland and Spain are characterized by a doubling of their
real R&D expenditures between 1995 and 2005.
Only in the case of Ireland has the increase in R&D expenditures been offset by a
larger increase in GDP, leading to an unchanged R&D intensity in Ireland.
Within the new Member States (NMS), Latvia, Lithuania, Hungary and the Czech
Republic stand out for their good performance in real R&D expenditures.
In all NMS, real GERD was approximately doubled. R&D intensities in these
countries were also subject to relatively high growth rate.
3.1.3 Beyond the Co-evolution of GDP and GERD
3.1.3.1 Sources of funding for R&D
We have investigated the extent to which R&D intensities (based on GERD) are
sensitive to GDP growth. However, in what follows we examine the evolution over
time of different components of R&D (depending on the sources of funding). The
following paragraphs therefore examine from which sectors (government or
industry) R&D expenditures were financed and how the shares have evolved over
time. Figure 8 shows the part of GERD financed by the private sector (business
enterprises) and the public sector (government) over the period 1995-2005 for the
EU27, the US and Japan (as a proportion of GDP).
Figure 8: GERD financed by business enterprises and by government as % of GDP: 1995-
2005
2,5
GERD as a % of GDP
JP
2 US
EU27
1,5
US
1 EU27
JP
0,5
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
financed by business enterprise ------ financed by government

Source: Eurostat
59
The private sector contribution to the funding of R&D has stagnated in the EU27
during 1995-2005, whereas especially in Japan, the share of R&D expenditures
financed by the business sector has increased.
For the US, the evidence is mixed: until 2000, business financed R&D
expenditures increased but from that point onwards were characterized by a fall.
Government funding of R&D has remained relatively stable in the last five years
of the period considered in all three economies.
While the previous figure gave an indication of the evolution in different funding
sources of R&D, Table 3 describes the shares of public and government funding as
a share of total R&D funding.
Table 3: Share of in total GERD funding of the business enterprise sector and government
sector: 1995, 2000, 2005 for EU27, Japan and US11
Share of GERD financed by Business Share of GERD financed by Government

enterprise sector (%) (%)
EU27 Japan US EU27 Japan US
1995 53 67,1 60,2 39 19,4 35,4

2000 56,3 72,4 68,6 34,2 19,6 25,8
2005 54,6 76,1 64 34,2 16,8 30,4
Source: IDEA Consult based on data from Eurostat
The table illustrates that the share of R&D funding by the business sector is
markedly higher in Japan and the US than in the EU27. The contribution of the
public sector to the total financing of R&D is highest in the EU27 countries. Japan is
characterized by a relatively low share of the government sector in total R&D
funding.
From Table 4, it seems that the differences between the US, Japan and the EU in
R&D intensities can be partially reflected by the above described differences in
sources of funding.
11
The shares of the business enterprise sector and the government sector in total R&D funding does not
sum to 100% as other sources of funding also exist, such as funding by the higher education sector
or funding raised abroad.
60
Table 4: Contribution of the main funding sectors (business enterprises and government) to
the overall R&D intensity gap (2005)
Privately Funded R&D Publicly Funded R&D

Intensity Intensity
R&D Intensity
(GERD financed by (GERD financed by
(GERD as % of GDP)
business sector as % government as % of
of GDP) GDP)
EU15 1.9 1.04 0.64
EU27 1.84 1.00 0.63
US 2.61 1.67 0.79

Japan 3.32 2.53 0.56
US-EU27 gap 0.77 0.67 0.17
JP-EU27 gap 1.48 1.53 -0.07
Source: IDEA Consult based on data from Eurostat
It appears from the table that the gap in R&D intensities between the US or Japan
and the EU can be accounted for by the gap in privately funded R&D intensities.
This could indicate that the business sector is an important factor to take into
consideration when looking at the R&D intensity gaps between the EU on the hand
and Japan and the US on the other hand.
3.1.3.2 Sectors of performance of R&D
Apart from different sectors of funding, GERD can also be typified by different
sectors of performance. More particularly, we investigate the R&D performed by the
Business Sector (i.e. BERD or Business Expenditures on R&D).
Figure 9 shows BERD as a % of GDP for the US, EU15 and EU27 and Japan for the
period 1995-2005.
Figure 9: Business enterprise expenditures (BERD) as % of GDP: 1995-2005
2,5
BERD as % of GDP
1,5
0,5
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Eurostat
According to Figure 9:
61
Again we notice that the EU is lagging behind the US and Japan concerning R&D
performed by the business sector.
The image of the evolution of BERD in the EU mirrors that of GERD, namely a
flat progression over time.
In Japan and the US, the movements in BERD intensities were relatively similar
with a positive tendency in private R&D investment in the second half of the
1990s.
The evolution of BERD diverged between the two countries in 2001, with Japan
experiencing a continued upward trend in business R&D investment, whereas in
the US there was a downturn in business R&D expenditures from 2001-2002.
In the last two years of our sample, BERD intensity in the US was stabilizing
again at around 1.8%.
3.1.3.3 Industrial Structure
Finally, we want to explore whether some of the observed differences in R&D

intensities between the EU, US and Japan could be explained by the different
industry structures of these economies. Industrial structure (although not the core
focus of this study) is in general receiving increasing attention in the literature as
technological specialisation (proxied by the industry-specific distribution of R&D
spending in manufacturing sectors) is increasingly considered as explaining the
variation in R&D intensity between countries (Mathieu and van Pottelsberghe,
2008). A comparison of the distribution of manufacturing R&D across industrial
sectors according to their level of technology intensity shows that in the US,
manufacturing R&D is more concentrated in high-tech sectors than in the EU (see
Duchne et al (2008)). The following figure presents some statistics on the value-
added share of high-, medium-, and low-tech sectors in the EU, Japan and the US.
62
Figure 10: Value-added share of High-Tech, Medium-Tech and Low-Tech manufacturing

industries in total economy for EU15*, US and Japan in 2002
Value Added Share of
Low-tech
Industry in Total
manufactures
Economy
Medium-tech
Manufactures
High-tech
manufactures
0 2 4 6 8 10 12
Japan United States EU15
Source: OECD
*EU15 does not include Luxembourg
Figure 10 shows that the value added shares of high tech sectors in the EU are
smaller than in the US or Japan and that the EU is mainly specialized in medium-
tech sectors. This difference in industrial structures could thus provide a possible
explanation for the differences in R&D intensities that we have observed between
the EU, Japan and the US.

The private sector contribution to the funding of R&D has stagnated in the EU27
during 1995-2005, whereas especially in Japan, the share of R&D expenditures
financed by the business sector has considerably increased.
The share of R&D funding by the business sector is markedly higher in Japan and
the US than in the EU27. The contribution of the public sector to the total
financing of R&D is highest in the EU27 countries.
The gap in R&D intensities between the US or EU or Japan and the EU can be
accounted for by the gap in privately funded R&D intensities.
The image of the evolution of BERD in the EU mirrors that of GERD, namely a flat
progression over time.
The value added shares of high tech sectors in the EU are smaller than in the US
or Japan; the EU is mainly specialized in medium-tech sectors. This difference in
industrial structures could thus provide a possible explanation for the differences
in R&D intensities that we have observed between the EU, Japan and the US.
63
3.2 Empirical analysis
3.2.1 Co-evolution of GDP and R&D: a test
The previous analysis has not provided clear evidence as to whether GDP growth is
a factor negatively affecting R&D intensity. In order to statistically test this
hypothesis statistically we compare the R&D intensities of two different groups of
countries within the EU27: the group of high GDP growth and the group of low GDP
growth. For every year starting from 1981 until 2007 we have assigned the
12
counties with GDP growth lower than the EU15 GDP growth to the group of
countries with low GDP growth. The countries with GDP growth higher than or equal
to the EU15 form the group of countries with high GDP growth.
Table 5: Comparison of average R&D-intensity of EU countries with high GDP growth vs.
countries with low GDP growth
Average R&D intensity of countries with

Year High GDP growth Low GDP growth
1981 1.3 1.5
1982 1.1 1.1
1983 1.5 1.6
1984 1.4 1.3
1985 1.5 1.7
1986 1.5 1.5
1987 1.7 1.7
1988 1.6 1.6
1989 1.6 1.9
1990 1.6 1.7
1991 1.6 2.3
1992 1.7 2.0
1993 1.9 1.6
1994 1.7 1.5
1995 1.8 1.6
1996 1.2 1.4
1997 1.2 1.7
1998 1.3 1.7
1999 1.5 1.1
2000 1.1 1.5
2001 1.1 2.1
2002 1.1 1.8
2003 1.2 1.7
2004 1.3 1.5
2005 1.3 1.6
2006 1.4 1.6
2007 1.3 1.5
Average 1.428 1.623
variance 0.057512 0.074456
p-value 0.007232
Source: IDEA Consult based on Eurostat data
In general we see that countries with lower R&D intensity face higher GDP growth.
This might seem contradictory to what the goals of the Lisbon Agenda are however
countries with high GDP growth are usually those that are catching-up in
technology usage and development which can be expected to affect the evolution of
R&D in the future.
12
The EU15 average for GDP growth is available in Eurostat data since 1994; for the years before, R&D
intensity is computed for both groups as the average of the R&D growth of all countries in each
group.
64
In summary, the previous table shows that:
The average value of R&D intensity for the groups of countries with relatively
high growth of GDP is 1.4%, while the average value of R&D intensity for the
groups of countries with relatively low growth of GDP is 1.6%.
The difference between the two averages of R&D intensity for the two groups is
statistically significant.
R&D intensity for EU countries with high GDP growth is statistically lower
compared to the R&D intensity of EU countries with low GDP growth by 0.2%.
3.2.2 Granger Causality and Co-integration tests by country
This section provides tests (Granger causality and co-integration) performed by

country (where possible) focusing on the ability of GDP to forecast GERD in some
EU countries.
3.2.2.1 Testing at country-level: Granger-causality test
Box 4: Granger causality
In time series econometrics, it is very difficult (or even impossible) to prove that a causal
relationship between time series X and time series Y (e.g. Real GDP and GERD) exists. But
by means of a Granger Causality test, we can examine whether one time series is
useful in forecasting another. According to the definition of causality of Clive Granger
(1980):
A (time series) variable X Granger causes Y, if the probability of Y conditional on its own
past history and the past history of X (besides the set of the available information) does
not equal the probability of Y conditional on its own past history alone.
However, Granger causality does not imply true causality.
It is shown that the use of non-stationary 13 data in causality tests can yield
spurious14 causality results (Park and Phillips, 198915). Thus, the Granger causality
test is relevant only when the variables involved are either stationary or non-
stationary but co-integrated 16. Hence, we employ unit root tests to examine the
stationarity properties of the variables. However, we have to take into account that
13 A stochastic process is (weakly) stationary if E[Yt] is the same for all t, Var[Yt] is the same for all t
and Cov[Yt ,Yt-k] is the same for all t and k > 0. Or in words: a stationary time series has a constant
mean, variance, and autocorrelation through time.
14 A correlation between two variables that does not result from any direct relation between them, but
from their relation to other variables.
15 Park, J. Y. and Phillips, P. C. B. (1989), Statistical inference in regressions with integrated processes:
Part 2, Econometric Theory 5, 95131.
16 Co-integration is a means for correctly testing hypotheses concerning the relationship between two
non stationary time series. When the two series are co-integrated, the values of either one can be
used to forecast the future of both.
65
unit root tests and co-integration tests are known to have low power and size
properties in small samples (which limits the reliability of our analyses).
17
Table 6: Hypothesis tested: Real GDP does not Granger-cause GERD (in real terms)*
(1981-2006)
Country p-value at p-value at p-value at p-value at p-value at
lag 1 lag 2 lag 3 lag 4 lag 5
Austria 0.12 0.03 0.03 0.03 0.11

Denmark 0.01 0.10 0.31 0.61 0.61
France 0.01 0.02 0.00 0.03 0.10
Finland 0.41 0.80 0.12 0.32 0.26
Italy 0.61 0.21 0.24 0.03 0.00
The Netherlands 0.51 0.49 0.44 0.70 0.64
Slovenia 0.01 0.52 0.93 0.33 n.a.
Spain 0.02 0.09 0.01 0.03 0.12
UK 0.27 0.06 0.17 0.11 0.00
US 0.06 0.02 0.03 0.04 0.03
* For most countries, we have taken the first differences of both real GDP and GERD in real terms (all
sectors). In order to be more correct, we should have formulated the null hypothesis as D(Real GDP)
does not Granger cause D(GERD in real terms).
Rejection of null hypothesis at the 0.05 level: bold p-values. Here, Real GDP does Grange-cause GERD in
real terms.
n.a.: no test results available
In case we have a p-value below 0.05, we can reject the null hypothesis that Real
GDP does not Granger-cause GERD. If this happens at lag 1, this means that Real
GDP at time t-1 helps forecasting GERD at time t.
The results of Table 6 indicate that Real GDP helps forecasting GERD (in real terms)
in most countries, except for Finland and the Netherlands. However, when
reversing the hypothesis to test whether GERD helps forecast GDP the findings
indicate that this cannot be confirmed. This second hypothesis is however further
analysed in the co-integration tests that follow below.
The main finding here indicate that, among the ten countries for which Granger
causality testing could apply, for eight of the countries real GERD can be used to
18
forecast GDP . For Finland and the Netherlands however this does not seem to be
the case. Especially for Finland, R&D seems to be directly connected to the
industrial structure of the country and its specialisation.
17 Because the time series of real GDP and GERD in real terms of all sectors are all increasing in time,
and therefore are not stationary, we had to apply techniques to make them stationary (see Annex
1). In the following table we present the results of the Granger causality tests of real GDP and
GERD in real terms for all sectors, after making them stationary.
18 In the previous page we give the definition for the co-integration test.
66
3.2.2.2 Testing at country-level: Co-integration test
Box 5: Co-integration
Co-integration is an econometric property of time series variables. If two or more series are
themselves non-stationary, but a linear combination of them is stationary, then the series
are said to be co-integrated. Co-integration is a means for correctly testing hypotheses
concerning the relationship between two non stationary time series. When the two series
are co-integrated, the values of either one can be used to forecast the future values of each
other.
The Johansen approach estimates the co-integration rank of a VAR-model. The

estimation model is a system of equations with on the left hand side the level-
values of the analysed time series and on the right hand side a specified number of
lags of these variables. The results of the Johansen test indicate the absence or
presence of a co-integrating relationship between the analysed time series, which in
our case are real GDP and GERD (in real terms), presented in the following tables.
The first table that follows presents the results of the co-integration test for GERD
and GDP, the second Table among business-funded GERD and GDP and the third
table of this subsection presents the co-integration test between government-
funded GERD and GDP.
Table 7: Estimation results of the Johansen test: GERD and GDP* (1981-2006)
Lags intervals
Country Lag 1-1 Lag 2-2 Lag 2-3 Lag 2-4 Lag 3-5
Austria Yes** Yes Yes No No

Belgium No No Yes n.a. n.a.
Denmark No No No No Yes***
France No No Yes No Yes
Finland No No No No Yes***
Italy No No Yes Yes Yes***
Latvia Yes Yes No Yes n.a.
The Netherlands Yes No No Yes Yes
Slovenia Yes No No Yes Yes***
Spain Yes No No No Yes
UK No No No Yes Yes
US No No No No Yes
* We allow for a linear deterministic trend in the data, but only an intercept in the co-integrating
equations (no trend in co-integrating equations, nor in the VAR)
** There is a positive number of co-integrating relations estimated by the model at the 0.05 level
(critical values based on MacKinnon-Haug-Michelis, 1999), both confirmed by the trace and the max-
eigenvalue test.
*** Only positive number of co-integration relations according to the trace test results
n.a.: no test results available
67
The results of the Johansen test indicate that there is a co-integrating relationship
between real GDP and GERD (in real terms) in each of the analysed countries.
Therefore, both variables can be used in order to forecast the future values of each
other. The lag interval at which we detect this co-integrating relationship varies
among the countries. While for Austria, Latvia, the Netherlands, Slovenia and Spain
we already detected a co-integrating relationship by including only the first lag, for
the rest of the countries (Belgium, Denmark, France, Finland, Italy, UK and the US)
there is indication for co-integration for higher levels of lags. In particular for
Denmark, Finland and the US there is indication of a co-integrating relationship
only after including the lag interval of 3 to 5 years.
Table 8: Estimation results of the Johansen test: Business-funded GERD and GDP* (1981-
2006)
Lags intervals
Austria No No No No Yes**
Belgium No n.a. n.a. n.a. n.a.
Denmark No No n.a. n.a. n.a.
France No No No No No
Finland n.a. n.a. n.a. n.a. n.a.
Italy No No No n.a. n.a.
Latvia Yes** Yes** n.a. n.a. n.a.
The Netherlands No No Yes Yes n.a.
Slovenia No Yes*** n.a. n.a. n.a.
Spain No No Yes Yes Yes**
UK Yes**** No No Yes Yes***
US No No No No No
eigenvalue test.
**** Only positive number of co-integration relations according to the max-eigenvalue test
n.a.: no test results available (insufficient number of observations)
Positive number of co-integrating relations estimated by the model at the 0.05 level if we allow for a
trend in the co-integrating equations
According to the results of the Johansen test among business-funded GERD and
GDP, we do not find any co-integrating relationship between real GDP and business
GERD for Belgium, Denmark, France, Finland, Italy and the US. However, for some
of these countries, there are no test results available for most of the lag levels due
to an insufficient number of observations. The test results are too confined to
conclude that there is no co-integrating relationship between real GDP and business
GERD at all for these countries. For the other countries, we do find a co-integrating
relationship between real GDP and business GERD (in real terms). The lag interval
at which we detect this co-integrating relationship varies among the countries.
While for Latvia, and the UK we already detected a co-integrating relationship by
68
including only a 1-lag interval, for the rest of the countries (Slovenia, Austria, the
Netherlands and Spain) there is indication for co-integration for higher levels of lags.
In particular for Austria there is indication of a co-integrating relationship only after
including the lag interval of 3 to 5 years.
Table 9: Estimation results of the Johansen test: Government-funded GERD and GDP*
(1981-2006)
Lags intervals
Austria No Yes No No No
Belgium No n.a. n.a. n.a. n.a.
Denmark Yes** Yes*** n.a. n.a. n.a.
France No No Yes Yes Yes**
Finland n.a. n.a. n.a. n.a. n.a.
Italy Yes** No Yes** n.a. n.a.
Latvia No Yes** n.a. n.a. n.a.
The Netherlands No No No No Yes**
Slovenia Yes** Yes n.a. n.a. n.a.
Spain No No Yes Yes** Yes**
UK No Yes** Yes** Yes** Yes**
US No Yes** Yes** Yes No

eigenvalue test.
n.a.: no test results available (insufficient number of observations)
Positive number of co-integrating relations estimated by the model at the 0.05 level if we allow for a
trend in the co-integrating equations
Comparable to the results for the business GERD, we do not find any co-integrating
relationship between real GDP and government GERD for some countries (Belgium,
Denmark, and Finland). But also here, we cannot make strong conclusions
regarding the absence of a co-integrating relationship, because of the data
availability. For the other countries, we do find a co-integrating relationship
between real GDP and government GERD (in real terms). If we compare the lag
interval at which we detect this co-integrating relationship with the results of
previous table (business GERD), we find more countries with an early co-
integrating relationship: by including only a 1-lag interval for Denmark, Italy and
Slovenia and by including a 2-lag interval for Austria, Latvia, UK and US. For the
other countries (France, the Netherlands and Spain) more lags are needed in order
to detect a co-integrating relationship
69
3.2.3 Regression analysis
In this section we test empirically the relationships between the log differences in
R&D (GERD) and the log differences in GDP (both expressed in real terms). The
intention is to see whether and to what extent GDP growth contributes to R&D
growth. Such an effect would imply that the negative effect of GDP growth on R&D
intensity (as GDP is in the denominator) could be offset by positive effects in R&D
spending.
Here, we investigate the relationship between R&D (GERD) and GDP taking into
account time lags. The intention is to investigate the extent to which increases in
GDP induce increases of the future values of R&D. Such evidence would imply that
the negative effect of GDP on R&D intensity (in terms of computation) can be to
some extent offset by the increase in R&D resulting from increases in GDP.
In this regression we also take into account some control variables that the
literature and our conceptual framework have indicated, as described in the
following paragraphs. The level of intellectual property rights protection is expected
to affect R&D intensity positively, however this might also depend on the
technology position that the leading companies in different countries possess
relative to the technology leaders that invest in their home markets. Regulations on
the labour market (that protect employment) can have a two-directional effect on
R&D expenditure: a positive one, as companies can invest more in incremental
process innovations due to the specialisation of their workforce and a negative one,
as companies are discouraged to undertake innovation-driven reorganisations of
their workforce. Restrictions on inward FDI are expected to decrease the incoming
knowledge spillovers from foreign companies. They can on the other hand
strengthen the market position of local companies and their profit margins, thereby
allowing for more investment in R&D.
70
Table 10: The effect of growth on R&D (1981-2006)
Dependent Variable = Log difference(real GERD); sample = EU27+US+JP

Method: cross-section random effects
Independent Variables Coefficient (p-value)
constant 0.0624 (0.4101)

Log difference(real GDP)-1 0.7689*** (0.0098)
Control Variables
Value-added of high-tech
-0.0031(0.4877)
manufacturing sector-1
IPR-1 -0.0110 (0.5109)
Product Market Regulation-1 -0.0068 (0.3334)
Employment Protection Legislation-1 0.0032 (0.7085)
FDI restrictions-1 0.1615** (0.0037)
Scientists & Engineers-1 -0.0018 (0.6030)
Number of observations 108

Adjusted R-squared 0.1814
Prob(F-statistic) 0.0002
*, **, ***: significant coefficient with probability 90%, 95% and 99%, respectively.
Log difference (real GERD) = Log(real GERD)- Log(real GERD-1)
Log difference (real GDP) = Log(real GERD-1)- Log(real GDP-2)
According to the estimation results of the previous table19:
The lagged value of the log difference of GDP has a positive effect on the
current value of the log difference in R&D, implying that although GDP
growth might influence R&D intensity negatively (GDP is in the
denominator) at time t, however it has a positive effect on R&D at t+1
(and thus R&D intensity) of the next period.
When taking into account the coefficient of the regression estimations

(0.7689) which relates the log difference of GERD to the log difference of
GDP, we see that, since the coefficient is lower than one, the percentage
increase in GERD at time t will be less than the percentage increase in
GDP in t-1, thus decreasing R&D intensity.
The effect of the difference in GDP on the differences in R&D seems to be

present with a time lag of up to 3 years.
A group of control variables has been added into the regression. From
those, restrictions on inward FDI have a positive effect on the log
differences of R&D.
19 A Granger causality test for the time series describing GDP and GERD cannot be applied due to the
limited time coverage of the series (for GERD this is 12 years).
71
4 Public R&D and the research base
4.1 Government funding of R&D

In the Annex we present the basic statistics on the indicators on public R&D
(GOVERD and GBAORD) as well as on the indicators that describe the research base
of the country: R&D personnel, number of scientists and engineers, number of
graduates (input indicators) and patent applications and publications (output
indicators). However in what follows we investigate the extent to which public R&D
is substituting business R&D.
R&D in the business sector is largely financed by the business sector itself; however,
the funding by government of business R&D is significant too. Does government
funding substitute for private funding of R&D? The figure below describes the
relationship between the share of business funded and government-funded R&D in
the EU for the year 2005.
Figure 11: R&D funded by the Business and Government sectors
0,9
GERD as % of GDP funded by Government Sector
A FIN SE
0,8 F
US
0,7 D
DK
EU27
0,6
UK CZ JAP
I SI
in 2005
0,5 E
LT P H B
0,4 EE IE
PL
BG
0,3 SK
GR L
CY LV
0,2 RO MT
0,1
0
0 0,5 1 1,5 2 2,5 3
GERD as % of GDP funded by Bus ines s Enterpise in 2005
Source: IDEA Consult based on Eurostat data
In the countries that present high R&D intensities like Finland, Sweden,
Germany, Denmark, Austria, the business sector is highly involved in the
funding of R&D.
At the same time however, for those countries government funding of
R&D also appears to be significant.
The figure implies that high levels of government-funded R&D coexist
with high levels of business-funded R&D.
72
4.2 Regression analysis
4.2.1 Public R&D and the output of research
In this section we try to analyse the relationship between government funding of

R&D and the research base. The research base is a function of the research output
(e.g. patents, publications) that is produced in the country which in turn is a
function of the research input (e.g. scientists and engineers, graduates, R&D
personnel) that is used in the knowledge-generation process. The intention here is
to examine whether and to what extent public R&D increases the research base of
the countries studied. We use the indicators of research output as the dependent
variables of the regressions. The intention is therefore to see what the effect of
public R&D is on the research output of the countries. We examine this effect on
two indicators of research output: the number of publications per inhabitant in the
countries and the number of patent applications to EPO per inhabitant. The
following table summarises the regression results.
Table 11: The effects of public R&D on the research output (1981-2006)
Dependent Variable = Log(Publications); sample = EU27+US+JP

Independent Variables Coefficient (p- Independent Coefficient (p-

(I) value) Variables (II) value)
constant 8.1645*** (0.0000) constant 8.6500*** (0.0000)

Log(GOVERD-1+HERD-1) 0.5660*** (0.000) Log(GBAORD-1) 0.4050*** (0.001)
Log(HERD -1) 0.3548*** (0.0006)
Log(Scientists &
0.3317*** (0.0044) Log(Scientists &
0.2161* (0.0558)
Engineers-3) Engineers-3)
Number of
109 91
Number of observations observations
Adjusted R-squared 0.1553 Adjusted R-squared 0.3634
Prob(F-statistic) 0.0000 Prob(F-statistic) 0.0000
Dependent Variable = Log(Patents); sample = EU27+US+JP

Independent Variables Coefficient (p- Independent Coefficient (p-

(I) value) Variables (II) value)
constant 1.6407*** (0.0003) constant 3.1557*** (0.0000)

Log(GOVERD-1+HERD-1) 0.5084** (0.0317) Log(GBAORD -1) 1.0233*** (0.0000)
Log(BERD-1) 0.8999*** (0.0000) Log(BERD-1) 0.7088*** (0.0000)
Log(Scientists & Log(Scientists &
0.7490*** (0.0008) 0.2073*** (0.3583)
Engineers-3) Engineers-3)
Number of
188 146
Number of observations observations
Adjusted R-squared 0.1946 Adjusted R-squared 0.2312
Prob(F-statistic) 0.0000 Prob(F-statistic) 0.0000
GBAORD = Government Appropriations or Outlays in R&D as percentage of total government
expenditure.
GOVERD = GERD performed by the government as percentage of GDP.
73
BERD = GERD performed by the business sector in real terms as percentage of GDP.
HERD = GERD performed by the higher-education sector in real terms as percentage of GDP.
Patents= Patent applications to the EPO per million inhabitants.
Publications =Number of total publications
Scientists and engineers = Share of scientists and engineers in total employment; between 25-64 years
According to the estimation results of Table 11:
R&D performed by the government and the higher-education sector

lagged by one year has a significant positive effect on the number of
publications as well as on the number of patent applications in the EU.
This effect lasts for time lags up to 8 years.
Publicly funded R&D (as expressed by GBAORD) with a one-year time lag
seems to have also a positive effect on the level of publications and on
the number of patent applications.
R&D performed by the business sector seems to affect positively the

number of patent applications, while R&D performed by the higher-
education sector seems to have a positive effect on the number of
publications.
The number of scientists and engineers affects positively both the

publication output and the patenting activity within the EU.
4.2.2 Public R&D and research input
Additionally to the effects of public R&D on the research output, it is interesting to

see the relationship between public R&D and the number of researchers present in
the EU countries. Here we focus on the effects of public R&D on the number of
researchers, using as a proxy the share of R&D personnel as percentage of total
employment. The following table gives the estimation results. Table 12 presents the
effects of public R&D on the share of R&D personnel. We present two different
estimation results, the first using GOVERD and HERD as the main explanatory
variable, and the second GBAORD. The findings provide similar implications.
Table 12: The effects of public R&D on research input (1981-2006)
Dependent Variable = Log(R&D personnel); sample = EU27+US+JP

Independent Variables (I) Coefficient (p-value)
constant 0.6612*** (0.0000)

Log(GOVERD-1+HERD-1) 0.4409*** (0.0000)
Log(BERD-1) 0.1444*** (0.0000)

Independent Variables (II) Coefficient (p-value)
constant 0.6747*** (0.0000)

Log(GBAORD-1) 0.2209*** (0.0000)
74
Log(HERD-1) 0.2150*** (0.0000)

Log(BERD-1) 0.2074*** (0.0000)

R&D personnel = R&D Personnel in FTEs as % of total employment.
GOVERD = GERD performed by the government in real terms as percentage of GDP.
GBAORD = Government Appropriations of Outlays in R&D as a percentage of total government
expenditure.
BERD = GERD performed by the business sector in real terms as percentage of GDP.
HERD = GERD performed by the higher-education sector in real terms as percentage of GDP.
According to the estimation results of the previous table:
R&D performed by the government and the higher-education sector

lagged by one year has a significant positive effect on the share of R&D
personnel in the economies. This effect lasts for time lags up to 2 years.
Publicly funded R&D (as expressed by GBAORD) with a one-year time lag
seems to have also a positive effect on the share of R&D personnel in the
economies. This effect also lasts for time lags up to 2 years.
R&D performed by the business sector seems as well as R&D performed

by the higher-education sector (used as control variables) positively
affects the share of R&D personnel in the economies.
We should note that additional findings when including government

funding of R&D as the main explanatory variable, indicate also significant
positive results on the share of R&D personnel in the economies but with
up to 7-year time lags.
75
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79
SPA4: A Time Series Analysis of the Development in National R&D Intensities and National Public Expenditures on R&D
Annex 1: List of indicators collected
Indicator Definition Time coverage Country coverage Data source
R&D expenditure
BERD (Business BERD in Millions of PPS at 1995 Prices and as a percentage 1980-200620 EU-27, US and Japan Eurostat
expenditures on R&D), of GDP, Millions of PPS at 1995 prices; all sectors, business
performance enterprise, government sector , higher education sector,
private non profit sector
BERD, funding BERD by source of funds all sectors, business enterprise,

government sector , higher education sector, private non
profit sector, abroad
GERD (Gross GERD per sector of performance: as % of GDP, Millions of 1980-2007* EU-27, US and Japan Eurostat
Domestic), PPS at 1995 prices; all sectors, business enterprise,
performance government sector , higher education sector, private non
profit sector
GERD, funding GERD by source of funds: in Millions of PPS at 1995 prices; 1981-2007* EU-27, US and Japan Eurostat
source of funds all sectors, business enterprise, government
sector , higher education sector, private non profit sector,
abroad
GOVERD, R&D R&D performed by Government Sector, in Millions of PPS at 1980-2007* EU-27, US and Japan Eurostat
performed by 1995 Prices, as % of GDP
Government Sector
HERD (R&D performed R&D performed by Higher Education, in Millions of PPS at 1980-2007* EU-27, US and Japan Eurostat
by Higher Education) 1995 Prices, as % of GDP
20 Data availability for 'all sectors' is ok, but once the data are split up according to source of funds, the earliest starting date is 1998
Januar 2009 80
Macroeconomic conditions
Real GDP Real GDP, chain-linked volumes, reference year 2000 (at 1980-2008* EU-27, US and Japan Eurostat
2000 exchange rates)21
Nominal GDP Nominal GDP in Millions of Euro 1980-2008* EU-27, US and Japan Eurostat
Real GDP growth Real GDP Growth 1980-2008* EU-27, US and Japan Eurostat
Harmonized Index of HICP Harmonized Index of Consumer Prices (2005=100) 1990-2007 Not for Bulgaria, Cyprus, Estonia, OECD
Consumer Prices Latvia, Lithuania,
Malta, Romania, Slovenia, US,
Japan, EU15 and EU 27 average
Harmonized Index of HICP Harmonized Index of Consumer Prices (2005=100) 1996-2007 Not for US and Japan Eurostat
Consumer Prices
Consumer Price Index CPI Consumer Price Index(2000=100) 1980-2007 Not for Bulgaria, Cyprus, Estonia, OECD
Latvia, Lithuania,
Malta, Romania, Slovenia, EU15 and
EU 27 average
Real interest rate Real shortterm interest rate (on the basis of GDP deflator 1980-2007* Not for Luxembourg AMECO
inflation) DATABASE
21 As we have had the preference to collect all main indicators from one source (Eurostat), we have used Real GDP at 2000 exchange rates which was the
indicators available from Eurostat.
81
Financial markets and financial resources
Venture capital early Venture capital early stage in millions of Euro and as a 1989-2006* Not for Bulgaria, Cyprus, Estonia, Eurostat
stage percentage of GDP Latvia, Lithuania, Luxembourg,
Slovenia, Malta, Japan, EU27
average
Nominal venture Venture capital expansion and replacement in millions of 1989-2006* Not for Bulgaria, Cyprus, Estonia, Eurostat
capital expansion and Euro and as a percentage of GDP Latvia, Lithuania, Luxembourg,
replacement Slovenia, Malta, Japan, EU27
average
Financial development Stock market capitalization as a percentage of GDP 1991-2007* EU-27, US and Japan Eurostat
Profit share Gross operating surplus and mixed income as share of GDP 1980-2007* Not for US Eurostat
Hi-tech in economy Value added share of high-tech manufacturers in total 1980-2003* Not for Bulgaria, Cyprus, Estonia, OECD
economy Latvia, Lithuania, Luxemburg, Malta,
Slovenia, Slovakia, Romania, Czech
Republic, EU15 average and EU 27
average
82
Market regulations
Product market Indicator of product market regulation (0= least restrictive, 1980-2003 Not for Bulgaria, Cyprus, Czech OECD
regulation 6= most restrictive) Product market regulation is measured Republic, Estonia, Hungary, Latvia,
as an average of OECD indices for regulation in seven large Lithuania, Luxemburg, Malta,
utility and service industries: airlines, postal services, Poland, Romania, Slovakia,
telecommunications, electricity, gas, railways, and roads. Slovenia, EU15 and EU27 averages
These industries are ranked according to several regulatory
dimensions (e.g. the size of entry barriers, firms freedom to
set prices, and the extent of public sector ownership). The
assumption here is that the average level of regulation in
those sectors is a good proxy for overall regulatory
impediments to product market competition in each
country.22
EPL (employment Employment Protection Legislation is described along 18 1990-2007 Not for Bulgaria, Cyprus, Estonia, OECD
protection legislation) basic items, which can be classified in three main areas: i) Latvia, Lithuania, Luxemburg, Malta,
employment protection of regular workers against individual Romania, Slovenia, EU15 and EU27
dismissal; ii) specific requirements for collective dismissals; averages
and iii) regulation of temporary forms of employment. The
index ranges from 0 to 6, with higher scores representing
stricter regulation.23
Regulatory Restrictions The FDI restrictions indicator is a measure of regulatory 1980, 1990, Not for Bu, Cyprus, Czech republic, OECD papers
in Inward FDI inward FDI restrictions (0=open, 1=closed). The indicator 2000, 2005 Estonia, Hungary, Latvia, Lithuania, Golub, Golub
covers three broad categories of restrictions: limitations on Luxemburg, Malta, Poland, & Koyama
foreign ownership, screening or notification procedures, and Romania, Slovakia, Slovenia, EU15
management and operational restrictions The Index covers and EU27 averages
the following sectors and sub-sectors: Business (legal,
accounting, architectural, and engineering services),
Telecommunications (fixed line telephony and mobile
telephony), Construction, Distribution, Finance (insurance
and banking), Tourism, Transport (air transport, maritime
22
For more details see M. Estavao (2005), Product Market Regulation and the Benefits of Wage Moderation, IMF Working Paper no WP/05/191
23
For more details see the OECD Employment Outlook (2004), Chapter 2, Employment Protection Regulation and Labour Market Performance
83

transport and road transport), Electricity and
Manufacturing.24
Barriers to trade and Barriers to trade and Investment 1998, 2003 Not for Bulgaria, Cyprus, Estonia, OECD
Investment Latvia, Lithuania, Malta, Romania,
Slovenia, EU15 and EU27 averages
Real effective Real effective exchange rate, deflated by unit labour costs 1980-2007* EU-27, US and Japan Eurostat
exchange rate (definition REE for EU27 is different)
Trade openness Exports plus Imports divided by Real GDP (Laspeyres): total 1980-2004* Not available for EU 15 and EU 27 Penn World
trade as a percentage of GDP averages Tables
Share of foreign R&D Share of GERD financed by abroad as % of GDP and in 1980-2005* Not US
millions of euro Eurostat
IPR 1997 All EU27 Ginarte and

IPR is the index of intellectual property rights due to Ginarte Park (1997)
and Park (1997) which measures the strength of patents
laws and enforcement. It is an index of the strength of IPR
varying from 0 to 5, with higher values reflecting stronger
IPR protection.
STI resources
Research Input
R&D personnel R&D Personnel as % of total employment 1992-2008* Not for US,UK
Eurostat
Share of scientists and Share of scientists and engineers in total employment (25- 1992-2006 Not for US and Japan
engineers 64 years) EU15 average Eurostat
Graduates in Graduates (ISCED 5-6) in mathematics, science and 1998-2006* Not EU15 average Eurostat
mathematics, science technology per 1 000 of population aged 20-29, since 1993
and technology
24
For more detail see Golub, S. S. (2003), "Measures Of Restrictions on Inward Foreign Direct Investment for OECD Countries", OECD Economics Department
Working Papers, No. 357
84
STI resources
Research Output
Patent applications at Patent applications to the EPO (European Patent Office) by 1980-2005** Not for EU15 average Eurostat
the EPO priority year at the national level, per millions of inhabitants
and by milliard Euro of total R&D expenditure
Patent applications at Patents granted by USPTO (US Patent and Trademark Office) 1980-2002 Not for EU15 average Eurostat
the USPTO by priority year at the national level, per millions of
inhabitants and by milliard Euro of total R&D expenditure
ICT in economy (VA share of ICT Manufacturers in Total economy) 1980-2003 Not for Bulgaria, Cyprus, Estonia, OECD
Latvia, Lithuania, Luxemburg, Malta,
Slovenia, Slovakia, Romania, Czech
Republic, EU15 average and EU 27
average
Public policies
GBOARD Total appropriations in millions PPS at 1995 Prices and in % 1980-2008* EU-27, US and Japan Eurostat
of GDP
GBOARD GBOARD as % of total government expenditures 1980-2008* Not US and Japan Eurostat
Public procurement Public Procurement as percentage of GDP 1993-2006 Not for US and Japan, EU27 average Eurostat
Fundamental research Fundamental Research as % of total R&D expenditures 1981-2006* Not for Belgium, Finland, Germany, Eurostat
Greece, Italy, Luxemburg, Malta,
Netherlands, Spain, Sweden, UK
Government funding of Government funding of business sector R&D in Millions of 1981-2007* EU-27, US and Japan Eurostat
business sector R&D 1995 PPS and as % of GDP
85
SPA4: A Time Series Analysis of the Development in National R&D Intensities and National Public Expenditures
on R&D
Annex 2: Additional Statistics
Additional Statistics on: GBAORD (as % of GDP), GERD (as % of GDP) and GOVERD (as % of GDP)
GBAORD in % of GDP (total GERD as % of GDP (government

Goverd as % of GDP
appropriations) sector)
% % %
1995 2005 1995 2005 1995 2005
Austria3 0,66 0,66 0% 0,73 0,88 22% 0,12

Belgium 0,51 0,59 16% 0,39 0,45 18% 0,08 0,15 88%
Denmark 0,66 0,71 8% 0,72 0,68 -6% 0,31 0,16 -48%
Finland 0,66 1,03 56% 0,79 0,89 12% 0,38 0,33 -13%
France 1,1 0,97 -12% 0,96 0,81 -15% 0,48 0,37 -23%
Germany 0,88 0,77 -13% 0,83 0,70 -15% 0,34 0,35 3%
Greece 0,26 0,32 23% 0,23 0,27 16% 0,11 0,12 9%
Ireland 0,32 0,49 53% 0,28 0,40 41% 0,11 0,09 -18%
Italy 0,56 0,67 20% 0,52 0,55 7% 0,21 0,19 -10%
Luxembour
g1,2,3 0,31 0,26 0,19
Netherlands
x
0,85 0,7 -18% 0,83 0,36 0,24 -33%
Portugal 0,43 0,73 70% 0,35 0,44 26% 0,15 0,12 -20%
Spain 0,48 0,84 75% 0,35 0,48 40% 0,15 0,19 27%
Sweden 1,08 0,87 -19% 0,94 0,89 -5% 0,12 0,18 50%
United
Kingdom 0,78 0,72 -8% 0,64 0,58 -10% 0,28 0,19 -32%
EU15 0,8 0,77 -4% 0,72 0,64 -11% 0,30 0,25 -17%
%
20004 2005
change
Bulgaria 0,43 0,31 -28% 0,24 0,31 29% 0,26 0,32 23%
Cyprus2,3,5 0,31 0,27 0,13
Czech
Republic5 0,55 0,31 0,58 88% 0,25 0,26 4%
Estonia2 0,34 0,4 18% 0,40 0,42 0,10 -76%
Hungary5 0,37 0,39 0,47 20% 0,19 0,26 37%
Latvia 0,18 0,2 11% 0,25 0,26 3% 0,22 0,10 -55%
Lithuania2,3 0,29 0,36 24% 0,48 0,19
Malta2,3,5 0,19 0,17 0,03
Poland 0,38 0,29 -24% 0,38 0,33 -14% 0,22 0,21 -5%
Romania2, 3 0,14 0,22 57% 0,22 0,14
Slovakia 0,36 0,28 -22% 0,35 0,29 -18% 0,37 0,15 -59%
Slovenia 0,51 0,59 16% 0,63 0,54 -13% 0,39 0,35 -10%
EU27 0,72 0,74 3% 0,70 0,63 -11% 0,30 0,25 -17%
Japan 0,65 0,71 9% 0,57 0,56 -1% 0,28 0,28 0%

US 0,85 1,06 25% 0,88 0,79 -10% 0,35 0,31 -11%
Source: Eurostat
1
For these countries, data on GBAORD (as % of GDP) were not available for the year 1995.
For these countries, data on GERD (as % of GDP) were not available for the year 1995.
For these countries, data on GOVERD (as % of GDP) were not available for the year 1995.
4
Because data were only marginally available for the year 1995 for the New Member States, we used data of
2000 instead
5
For these countries, data on GBAORD (as % of GDP) were not available for the year 1995.
Januar 2009 86
Additional Statistics on: R&D personnel, Scientists and Engineers, and number of graduates

% % %
2000 2005 1998 2005 1998 2005
Austria3,4 2,40 3,60 50% 7,90 9,80 24%

Belgium3,7 1,85 7,90 8,60 9% 10,90
Denmark 2,07 2,44 18% 5,20 7,10 37% 8,10 14,70 81%
Finland 2,95 3,22 9% 8,60 7,50 -13% 15,90 17,70 11%
France 1,64 1,73 5% 4,60 5,80 26% 18,50 22,50 22%
Germany3 1,85 5,90 6,60 12% 8,80 9,70 10%
Greece3, 7 1,41 4,00 4,50 13% 10,10
Ireland 1,25 1,45 16% 7,00 8,40 20% 22,90 24,50 7%
Italy 1,08 1,23 14% 3,00 3,70 23% 5,10 12,40 143%
Luxembour
g3,8 2,59 5,50 5,80 5% 1,40
Netherlands
3
1,40 6,10 6,90 13% 6,00 8,60 43%
Portugal 0,76 0,87 14% 2,20 3,40 55% 5,20 12,00 131%
Spain3 1,49 4,60 5,40 17% 8,00 11,80 48%
Sweden3 2,71 5,30 7,60 43% 7,90 14,40 82%
United
Kingdom3, 4 7,80 5,60 -28% 15,50 18,40 19%
EU155,6, 7, 8 1,51 1,59 5%

Bulgaria5 0,60 0,63 5% 3,60 5,50 8,60 56%
Cyprus5, 7 0,55 0,71 29% 4,60 3,60
Czech
Republic 1,14 1,37 20% 3,40 3,70 9% 4,60 8,20 78%
Estonia 1,14 1,31 15% 2,80 3,90 39% 3,30 12,10 267%
Hungary 1,18 1,27 8% 3,40 4,00 18% 5,00 5,10 2%
Latvia 0,87 0,92 6% 4,70 4,30 -9% 6,10 9,80 61%
Lithuania 1,04 1,11 7% 4,70 5,10 9% 9,30 18,90 103%
Malta3, 5 0,89 4,00 1,30 3,40 162%
Poland 0,86 0,87 1% 2,90 5,60 93% 4,90 11,10 127%
Romania 0,35 0,45 29% 4,20 4,50 10,30 129%
Slovakia 1,06 1,01 -5% 3,30 3,10 -6% 4,30 10,20 137%
Slovenia 1,36 1,33 -2% 3,40 5,50 62% 8,00 9,80 23%
EU275 1,36 1,45 7% 5,50 8,80 13,20 50%
Japan3, 5, 6 1,71 12,30 13,70 11%

US3, 4, 5, 6 9,20 10,60 15%
Eurostat
1
2
4
5
6
7
8
87
Additional Statistics on: Patent applications to the EPO and USPTO by priority year at the national
level, Per Millions of Inhabitants and number of publications
Patent applications EPO Patent applications USPTO Number of publications

% % %
1995 2005 1995 20022 20003 20044
Austria 85,10 179,98 111% 57,61 68,81 19% 6620 7741 6620
Belgium 80,04 124,64 56% 68,46 43,75 -36% 9082 10789 9082
Denmark 95,24 155,60 63% 81,40 54,58 -33% 7111 7448 7111
Finland 139,79 223,24 60% 127,94 113,19 -12% 6811 7148 6811
France 86,71 115,18 33% 64,76 40,62 -37% 44136 44176 44136
Germany 160,46 269,32 68% 117,00 111,64 -5% 61000 62528 61000
Greece 2,54 4,33 70% 1,18 0,91 -23% 4325 6094 4325
Ireland 27,51 57,68 110% 29,25 44,36 52% 2317 3032 2317
Italy 43,67 71,79 64% 27,24 25,51 -6% 29167 34687 29167
Luxembour
g 79,77 189,01 137% 54,63 121,61 123% 91 139 91
Netherlands 113,49 165,28 46% 80,05 71,78 -10% 17624 19682 17624
Portugal 1,40 10,73 666% 0,98 2,03 107% 2916 4491 2916
Spain 9,87 26,37 167% 6,10 7,42 22% 20622 25016 20622
Sweden 172,60 152,03 -12% 153,93 89,46 -42% 13929 14499 13929
United
Kingdom 65,72 86,68 32% 60,74 45,43 -25% 68822 67581 68822
EU151
Bulgaria 0,97 0,52 -46% 0,65 0,25 -62% 1466 1487 1%
Cyprus5 0,31 2,83 813% 157 239 52%
Czech
Republic 1,74 6,95 299% 2,35 4,31 83% 3841 4791 25%
Estonia 2,07 5,19 151% 0,69 0,00 -100% 531 631 19%
Hungary 5,32 6,34 19% 5,54 2,56 -54% 3707 4056 9%
Latvia 0,76 5,20 584% 0,76 0,85 12% 346 324 -6%
Lithuania 0,82 0,58 -29% 0,09 0,29 222% 434 676 56%
Malta6 2,71 22,35 725% 5,07 29 45 55%
Poland 0,35 2,83 709% 0,45 1,02 127% 8731 11566 32%
Romania 0,34 2,08 512% 0,26 0,55 112% 1889 2098 11%
Slovakia 1,29 5,76 347% 0,86 0,19 -78% 1728 1759 2%
Slovenia 12,56 29,54 135% 9,38 9,53 2% 1462 1594 9%
EU277 65,46 101,30 55% 49,94 42,09 -16%
Japan 99,88 157,32 58% 238,81 258,49 8% 66885 67628 1%

US 83,01 99,56 20% 329,83 315,24 -4% 235950 251767 7%
Source: Eurostat
1
There are no data available for the average of the EU15 on patent applications and on the number of
publications for the year 1995 and 2005.
2
The latest available data are for 2002 which is used here.
3
The earliest available data are for 2000 which is used here.
4
The latest available data are for 2004 which is used here.
5
For Cyprus, data on patent applications to the EPO were not available for the year 1995 and 2005.
6
For Malta, data on patent applications to the USPTO were not available for the year 1995.
7
For the EU27 average, data on number of publications were not available for the year 2000 and 2004.
88
Annex 3: Additional graphs based on the data

collected
Evolution of GERD PPS (performed by all sectors) and Real GDP (divided by 100) per country (all
EU27-countries, US and Japan), from 1980 to 2008
- EU-15
Austria Belgium

6.000 5.000
280.000 300.000

5.000 4.500
280.000 4.000
240.000
4.000
3.500
260.000
3.000
200.000 3.000
2.000 240.000
2.500
160.000
1.000 220.000 2.000
0 1.500
120.000 200.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
GERD Real GDP GERD Real GDP
Denmark Finland

3.500 5.000
180.000
200.000 3.000
4.000
160.000
2.500
180.000
3.000
2.000 140.000
160.000
1.500 2.000
120.000
140.000
1.000
1.000
120.000 100.000
500
0
100.000 80.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
France Germany
28.000 48.000
1.800.000
2.300.000 44.000
1.600.000 24.000
2.200.000
1.400.000 40.000
20.000 2.100.000
1.200.000 2.000.000 36.000
16.000 1.900.000
1.000.000 32.000
1.800.000
12.000
800.000 1.700.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
89
Greece Ireland

1.200 2.000
200.000

1.000 160.000 1.600
180.000
800 140.000 1.200
160.000
600 120.000 800
140.000
400 100.000 400
120.000 200 80.000 0
0
100.000 60.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Italy Luxemburg

14.000 350

340
1.300.000 12.000
32.000 330
1.200.000
10.000 320
28.000
1.100.000
310
1.000.000 8.000 24.000 300
900.000
290
6.000 20.000
800.000
700.000 16.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
The Netherlands Portugal


7.000 1.200
140.000
500.000
1.000
6.000 130.000
450.000
400.000 800
5.000 120.000
350.000 600
110.000
4.000
300.000
400
100.000
250.000
3.000
200
200.000 90.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Spain Sweden
10.000 10.000
900.000 360.000
800.000 8.000
320.000 8.000
700.000 6.000
280.000
6.000
600.000
4.000
240.000
500.000
4.000
2.000
200.000
400.000
0 2.000
300.000 160.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
90
UK

24.000
2.000.000 22.000
1.800.000
20.000
1.600.000
18.000
1.400.000
16.000
1.200.000
1.000.000 14.000
800.000
1980 1985 1990 1995 2000 2005
GERD Real GDP
- New Member States
Bulgaria GERD in millions of PPS at 1995 prices Cyprus

700 60
600

14.000
50
500
13.000
400
22.000 40
300 12.000
20.000 200 30
11.000
18.000 100
10.000 20
16.000
14.000 9.000 10
12.000 8.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Czech Republic Estonia

90.000 200
175
80.000
12.000
150
2.400
70.000
10.000 125
2.000
60.000 100
8.000
1.600 75
50.000
6.000 50
1.200
800 4.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Hungary Latvia
1.400 200
1.200
70.000 160
18.000
1.000
65.000 16.000 120
60.000 800 14.000
80
55.000 600 12.000
50.000 10.000 40
400
45.000 8.000
40.000 6.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
91
Lithuania Malta

300 40
24.000

35
250 5.000
20.000 30
200 4.800
25
16.000 4.600
150
20
4.400
12.000 100 15
4.200
50
8.000 4.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Poland Romania

2.200 650
260.000

600
240.000 2.000 65.000
550
60.000
220.000 500
1.800
55.000
200.000 450
50.000
400
180.000 1.600
45.000
350
160.000
40.000
1.400
140.000 35.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Slovakia Slovenia

600 550
500 500
32.000
450
40.000 400 28.000
400
35.000 300 24.000
350
30.000
200 20.000 300
25.000
16.000 250
20.000
15.000 12.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
- Japan and the US
Japan US
90.000 240.000
5.800.000
14.000.000
80.000
5.600.000
200.000
12.000.000
70.000
5.400.000
10.000.000 160.000
60.000
5.200.000
50.000 8.000.000
5.000.000 120.000
40.000 6.000.000
4.800.000
80.000
30.000
4.600.000 4.000.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
92
Evolution of GERD in millions of PPS at 1995 prices (funded by business sector and by government)
and Real GDP in millions of euro per country, from 1980 to 2008
- EU-15
Austria Belgium

2.500 3.000

2.500
280.000 2.000
2.000
240.000 1.500 300.000 1.500
280.000 1.000
200.000 1.000
260.000 500
240.000
160.000 500
220.000
120.000 200.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

GERD (funded by business) GERD (funded by business)
GERD (funded by government) GERD (funded by government)
Denmark Finland

2.000 3.000
2.500
1.600
2.000
1.200
200.000 180.000 1.500
800
1.000
180.000 160.000
400 500
160.000 140.000
0 0
140.000 120.000
120.000 100.000
100.000 80.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

France Germany

16.000 32.000
14.000 28.000
1.800.000 24.000
12.000
20.000
1.600.000 10.000
2.300.000 16.000
8.000
1.400.000 2.200.000 12.000
6.000 2.100.000
1.200.000
2.000.000
4.000
1.000.000 1.900.000
1.800.000
800.000 1.700.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

GERD (funded by government) GERD (funded by goverment)
93
Greece Ireland

500 1.000

200.000 800
400
600
180.000 300 160.000
400
140.000
160.000 200
200
120.000
140.000 100 0
100.000
120.000 0 80.000
100.000 60.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

Italy Luxemburg

7.000 300
250

6.000
200
1.300.000 5.000 150

32.000
1.200.000 100
4.000 28.000 50
1.100.000
0
1.000.000 3.000 24.000
900.000
20.000
800.000
700.000 16.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP



3.600 800
3.200
600
2.800
140.000
500.000 400
2.400
450.000 130.000
2.000 200
400.000 120.000
350.000 1.600
110.000 0
300.000
100.000
250.000
200.000 90.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

94
Spain Sweden

5.000 6.000

900.000 5.000
4.000
4.000
800.000
3.000 3.000
360.000
700.000
2.000 320.000 2.000
600.000
280.000 1.000
500.000 1.000
240.000
400.000 0 200.000
300.000 160.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

UK
11.000
10.000
9.000
8.000
2.000.000
7.000
1.800.000
6.000
1.600.000
5.000
1.400.000
1.200.000
1.000.000
800.000
1980 1985 1990 1995 2000 2005
Real GDP
- New Member States
Bulgaria Cyprus
500 40
400
30
300
20
22.000 200 14.000
13.000 10
20.000 100
12.000
18.000 0 0
11.000
16.000
10.000
14.000 9.000
12.000 8.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

95

1.400 100

1.200
80
90.000 12.000
1.000
60
80.000 800 10.000
40
600
70.000 8.000
400 20
60.000 200 6.000 0
50.000 4.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

GERD (funded by goverment) GERD (funded by government)
Hungary Lithuania

600 200

500 160
70.000 120
400
24.000
65.000 80
300
60.000 20.000
40
200
55.000
16.000 0
50.000 100
12.000
45.000
40.000 8.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

GERD (funded by government) GERD (funded by goverment)
96
Latvia Malta

100 20

80 5.000
16
18.000
60 4.800
16.000 12
40 4.600
14.000 8
12.000 20
4.400
4
10.000 0
4.200
8.000 0
6.000 4.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

Poland Romania

1.400 450
400

1.200
350
1.000 300
250
260.000 800 65.000
200
240.000 600 60.000 150
220.000 55.000 100
400
200.000 50.000
180.000 45.000
160.000 40.000
140.000 35.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

Slovakia Slovenia

400 350
350
300
300
250
250
200 32.000 200
40.000
150
28.000 150
35.000 100
24.000 100
30.000
25.000 20.000
20.000 16.000
15.000 12.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

GERD (funded by business) ERD (funded by business)
97
- Japan and the US
Japan
US

80.000
160.000
60.000 140.000

120.000
40.000
100.000
5.800.000
14.000.000 80.000
20.000
5.600.000
12.000.000 60.000
5.400.000 0 40.000
10.000.000
5.200.000
5.000.000 8.000.000
4.800.000 6.000.000
4.600.000 4.000.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Real GDP Real GDP

98
Evolution of GERD in millions of PPS at 1995 prices (funded by government) and total R&D personnel
in full time equivalents per country, from 1980 to 2008
- EU-15
Austria Belgium


2.000 1.100
60.000 1.750 1.000

60.000
1.500 900
50.000
55.000
1.250
800
40.000 50.000
1.000
45.000 700
30.000
750
40.000 600
20.000 500
35.000
10.000 30.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
R&D personnel GERD by government R&D personnel GERD by government
Denmark Finland


900 1.200
50.000 800 1.000

60.000
700 800
40.000 50.000
600 600
40.000
30.000
500 400
30.000
20.000 200
400 20.000
10.000 10.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
France Germany

11.000 14.000
13.600
10.000
360.000 13.200
340.000 12.800
9.000 520.000
320.000 12.400
480.000
300.000 8.000 12.000
440.000
280.000 400.000
7.000
260.000 360.000
240.000 320.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
R&D personnel GERD by government R&D personnel GERD government
99
Greece Ireland


500 500
36.000
400
32.000 400 20.000
28.000 300
300 16.000
24.000
200
20.000 12.000
200
16.000 100
8.000
12.000
100
8.000 4.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Italy Luxemburg


7.000 60
180.000
50
6.000
4.600
160.000
40
4.400
5.000
140.000 4.200 30
4.000
4.000
20
120.000
3.800
3.000
100.000 3.600
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

2.600 700
28.000
2.400 600
100.000
2.200 24.000
90.000 500
2.000 20.000
80.000 400
1.800 16.000
70.000 300
1.600
60.000 12.000
200
50.000 8.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Spain Sweden

5.000 2.000
4.000 80.000 1.800

200.000
3.000 1.600
160.000 70.000
2.000 1.400
120.000
60.000
1.000 1.200
80.000
0 50.000 1.000
40.000
0 40.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
100
UK

8.000
7.500
7.000
6.500
340.000
6.000
320.000
5.500
300.000
280.000
260.000
240.000
1980 1985 1990 1995 2000 2005
R&D personnel GERD by government
- New Member States
Bulgaria Cyprus


200 35
160 30
1.400
45.000 1.200 25
120
40.000
1.000 20
35.000 80
30.000 800
15
25.000 40
600
20.000 10
400
15.000
10.000 200
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
R&D personnel GERD by government R&D personnel GERD government


1.000 90
80
50.000
70
800
45.000 60
50
40.000 600 4.800 40
4.600 30
35.000
400 4.400
30.000 4.200
4.000
25.000 200
3.800
20.000 3.600
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Hungary Latvia

600 100
80
60.000 500
7.000
50.000 60
400
6.500
40.000 40
6.000
300
30.000 5.500
20
200 5.000
20.000
4.500
10.000 4.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
R&D personnel GERD by government R&D personnel GERD by personnel
101
Lituania Malta

180 12,5
160 12,0
140 11,5
120 800 11,0
100
10,5
13.000 80 700
10,0
12.000
600 9,5
11.000
500
10.000
9.000 400
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
R&D personnel GERD by government R&D personnel GERD by goverment
Poland Romania


1.400 450
1.300 400
1.200 80.000 350
1.100 300
70.000
1.000 250
86.000
84.000 900 60.000
200
82.000
80.000 50.000 150
78.000 100
76.000 40.000
74.000
72.000 30.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
Slovakia Slovenia

220 200
200 180
180
160
160
140
140
18.000 10.000
120 120
17.000
100 9.000 100
16.000
8.000
15.000
14.000 7.000
13.000 6.000
1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005
- Japan (no data available on R&D personnel for the US)
Japan
16.000
14.000
12.000
1.000.000
10.000
900.000
8.000
800.000
700.000
600.000
1980 1985 1990 1995 2000 2005
R&D personnel GERD by government
102

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A Time Series Analysis of the Development in National R&D

Intensities and National Public Expenditures on R&D

Final Study Report for Specific Assignment 4 (SPA4):

Literature Review, Feasibility Study, Collection of Field Statistics,

IDEA CONSULT (Coordinator)

FRAUNHOFER-ISI, NIFU STEP, ZEW

Brussels, December 2008

EXECUTIVE SUMMARY ................................................................................ 5

Part 1: Policy relevant considerations and findings .......................... 7

2 Co-evolution of R&D expenditures and GDP growth over time............ 13

3 Publicly funded R&D and its influence on the research base............... 17

4 Country specific findings .................................................................... 18

5 Policy relevant findings ...................................................................... 34

Part 2: Technical background ......................................................... 37

1 Literature Review ............................................................................... 38

1.1.1 Growth theory: an introduction ........................................................................ 38

1.1.2 Endogenous growth: the effect of R&D and spillovers.......................................... 39

1.1.3 The determinants of R&D................................................................................. 40

1.2.1 Rationale for Public R&D .................................................................................. 43

1.2.2 Effects of Public R&D....................................................................................... 44

2 Feasibility study ................................................................................. 48

2.1 The conceptual framework .......................................................48

2.3.1 Data sources used .......................................................................................... 50

2.3.2 Data coverage and analysis ............................................................................. 50

2.4 Expert involvement and validation ............................................51

3 The co-evolution of GDP and R&D....................................................... 53

3.1.2 Co-evolution of GDP and GERD: Changes in GERD and GDP................................. 55

3.1.3 Beyond the Co-evolution of GDP and GERD........................................................ 59

3.2 Empirical analysis ...................................................................64

3.2.2 Granger Causality and Co-integration tests by country ........................................ 65

3.2.3 Regression analysis......................................................................................... 70

4 Public R&D and the research base ...................................................... 72

4.2.1 Public R&D and the output of research .............................................................. 73

4.2.2 Public R&D and research input.......................................................................... 74

References and bibliography .................................................................... 76

Annex 1: List of indicators collected .................................................. 80

Annex 2: Additional Statistics ............................................................ 86

Annex 3: Additional graphs based on the data collected.................... 89

We would like to acknowledge the insightful comments and suggestions of Professor

Dominique Guellec (OECD)

Hugo Erken (Ministry of Economic Affairs in The Netherlands)

Nick Von Tunzelmann (SPRU, University of Sussex, UK)

Piet Donselaar (Ministry of Economic Affairs in The Netherlands)

Philip Shapira (University of Manchester and Georgia Institute of Technology

Evanthia Schmidt (Aarhus University, Denmark)

Gonzalo Len (Polytechnic University of Madrid, Spain)

Antoine Schoen (ESIEE Engineering, France)

Andreas Reinstaller (WIFO, Austria)

Kai Husso (Ministry of Employment and the Economy, Finland)

Maja Bucar (University of Ljubljana, Slovenia)

As intuitively expected, levels of R&D spending are interrelated to the levels

A longitudinal approach seems more suitable for monitoring progress in R&D

The effect of government-performed R&D is significant and positive on the

Part 1: POLICY RELEVANT CONSIDERATIONS AND

1.1 R&D intensities as indicators of progress

The contribution of this small-scale study to the above summarized debate is

1.2 The analytical framework

1. To analyse and understand the co-evolution of R&D expenditure, R&D

2. To analyse and understand the relationship between public R&D

Box 1: Highlights literature review

First of all we have produced descriptive statistics on the evolution of R&D

Dominique Guellec (OECD)

Hugo Erken (Ministry of Economic Affairs in The Netherlands)

Nick Von Tunzelmann (SPRU, University of Sussex, UK)