1

R&D in the European Strategy:the case of the 3% effort of

BARCELONA

CESAERPOLITECNICO DI MILANO

Milano 12-14 Nov 2008

2

R&D in the European Strategy:the case of the 3% effort of BARCELONA

I. Methodological and Theoretical Aspects

II. Results of the reference scenario V0

III. Other Results

IV. Conclusions

3

I. Methodological and Theoretical Aspects

I.1 What can we learn from new growth theories ?

I.2 The Technical Progress in NEMESIS

I.3 Overview of the different exercises

4

I.1 What can we learn from the new growth theories? 1/2

We can act on long term growth

R&D Policies are important

Precise description of endogenous technical progress

5

I.1 What can we learn from the new growth theories? 2/2

Possibilities of non decreasing returns

Knowledge externalities– Social returns of research are greater than private

returns

– Spontaneous research level is insufficient

6

I.1 New growth theories in applied modelling

Two types of innovations– Process– Product (quality)

Endogenous technical progress– Learning– R&D

Knowledge externalities (Knowledge Spillovers)– Inter-sectoral– Inter-national

7

I.2 The technical progress in NEMESIS 1/9

From R&D to knowledge stock

From knowledge to innovations

From innovation to economic performances

8

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

KNOW

Foreign Public R&D StockR&D Stocks of Foreign

SectorsPublic R&D Stock

R&D Stock of Other Sectors

R&D Stock of the Sector

Technology Flow MatricesTechnology Flows

Matrices

R&D StockR&D Expenditures Decay

9

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

Product Innovation (Quality)

ΔKNOW

Process Innovation

10

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

Process innovation:

Supply

Demand

Productivity Growth Increase of supply

Process InnovationPrice Decrease

volume/price elasticity of

the demand ε

Increase of the demand

11

I.2 The technical progress in NEMESIS 5/9From innovations to economic performances

Process innovation :– Increase of the demand greater than the supply

increase if ε>1

– But in time series ε<1

→ Thus, absorption following a productivity shock is not sufficient for maintaining factors use

12

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

Product Innovation:

Supply

Demand

Product Innovation (Quality)

Increase of efficiency by volume unit

Decrease of the efficiency unit price

Variation of volume demand

Increase of efficiency unit demand

13

I.2 The technical progress in NEMESIS 7/9From innovations to economic performances

Product innovations:

– For a production increase, the increase of the demand for the new efficiency must be greater than the increase of efficiency due to the innovation, that is generally the case.

– Moreover, product innovations makes more than compensate the decrease of factor employment due to process innovations

14

I.2 The technical progress in NEMESIS 8/9Technical progress equations

Process innovations

Quality (product) innovations

TFP KNOWa

TFP KNOW

'QUAL KNOW

aQUAL KNOW

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I.2 The technical progress in NEMESIS 9/9 Technical progress equations

Economic performance

'Y TFP QUAL

Y TFP QUAL

Production increase

Demand increase due to

process innovations

Demand increase due to

quality innovations

' 'Y KNOW Y KNOW

a aY KNOW Y KNOW

16

I.2 Estimations of the elasticity of 1/2 Production with respect to R&D and KNOW

Econometric studies

– α similar role than β

,Y A SRD F K L

Y SRD

Y SRD

17

I.2 Estimations of the elasticity of 2/2 Production with respect to R&D and KNOW

Value of α in the literature (Mohnen [90], Griliches [92], Nadiri [93], Cameron [98], Guellec et [92] van Pottelsberghe de La Potterie [2001], Bagnoli [2001])

– Between 0.05 et 0.20

18

I.3 R&D and knowledge productivity in NEMESIS

First assumption : R&D elasticity vary with the technological advancement of the sector: it is strongest in R&D intensive sectors and thus strongest in R&D intensive countries

Other assumptions: R&D elasticity is identical in all sectors and countries:

– β=0.1– β=0.2

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I.3 An important mechanism

Sharing of productivity gains

– 0% of productivity gains goes to wages

– 33% of productivity gains goes to wages

– 100% of productivity gains goes to wages

20

I.3 Implementation of R&D policies

Public or private financing

Public procurements

Private research vs 1/3-2/3

Absolute or relative convergence of countries

21

I.3 Summary of realised simulations

Public-sector

Finance for

Research

Private-sector

Finance for

Research

100 %

Research

β = 0.05 + 0.5*f(R/Y) 2010 : 0.075 ; 2030 : 0.124

Public-sector orders

V0.1

V2.0V1.0V0.0V5.0V4.0

V0.4

Relative Convergence V0.3

V0.2

β = 0.025 + f(R/Y) 2010 : 0.075 ; 2030 : 0.141

= 0.10

Tot

al c

onve

rgen

ce

Productivity gains:100 % to Employees

Productivity gains:33 % to Employees

Productivity gains:0 % to Employees

22

II. Results of the reference scenario V00

II.1 Macro-economic results for Europe

II.2 Sectoral results for Europe

II.3 Results for one country (France)

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II.1 Macro-economic results for Europe

2010 2030 2010 2030 2010 2030 2010 2030

Austria 36 145 29 52 1.06 9.01 0 1.15

Belgium 41 155 34 59 1.17 7.52 0.13 0.7

Denmark 24 64 22 39 0.96 8.08 -0.07 0.71

Germany 366 1722 324 441 1.06 7.62 0.04 0.95

Finland 17 63 16 35 0.88 5.85 0.08 -0.42

France 303 949 208 345 1.18 7.06 0.07 0.97

Greece 102 781 80 199 6.26 49.84 0.26 11.45

Ireland 55 231 55 133 1.74 15.81 0.11 1

Italy 368 1728 332 627 2.98 19.82 0.59 5.44

Netherlands 75 384 58 124 0.95 8.05 0 1.05

Norway 39 157 29 53 1.56 12.71 0.62 3.65

Portugal 39 221 57 119 4.37 24.71 0.45 5.01

Spain 205 1008 219 402 3.19 22.62 0.18 6.28

Sweden 13 62 9 9 0.79 3.67 0.19 -0.28

U.K. 400 2335 250 502 1.51 12.75 -0.03 3.16

Europe 2084 10007 1634 3140 1.7 12.15 0.13 2.33

Employment and Research Employment in thousands, GDP in %, Budget Balance in GDP points

Total Employment Research Employment GDP Budget Balance

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II.1 Macro-economic results for Europe

GDP, Employment and Public Financing Capacity for Europe (in %)

-2

0

2

4

6

8

10

12

14

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

GDP (Europe)

Employment (Europe)

PFC in % GDP (EUROPE)

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II.1 Macro-economic results for Europe

GDP and its Counterparts for Europe (in % Deviation w.r.t. the Baseline)

-5

0

5

10

15

20

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Final Cons. (Europe)

Firms' Investment (Europe)

Exports (Europe)

Imports (Europe)

GDP (Europe)

Employment (Europe)

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II.2 Sectoral results for Europe

Production, Employment and Investment for European Sectors in 2030 (in % Deviation w.r.t. the Baseline)

-5

0

5

10

15

20

25

Agr

icul

ture

Coa

l & C

oke

Oil

& G

as E

xtr.

Gas

Dis

tr.

Ref

ined

Oil

Ele

ctric

ity

Fer

. &

Non

Fer

. M

et.

Non

Met

. M

in P

rodu

cts

Che

mic

al P

rod.

Met

al P

rod.

Agr

. &

Ind

. M

ach.

Off

ice

Mac

h.

Ele

ctr.

Goo

ds

Tra

nsp.

Equ

ip.

Foo

d,D

rink

& T

ob.

Tex

t.,

Clo

thes

& F

ootw

.

Pap

er &

Prin

t. P

rod.

Rub

ber

& P

last

ic

Oth

er M

anuf

.

Con

stru

ctio

n

Dis

trib

utio

n

Lodg

ing

& C

ater

ing

Inla

nd T

rans

p.

Sea

& A

ir T

rans

p.

Oth

er T

rans

p.

Com

mun

icat

ion

Ban

k, F

inan

ce &

Ins

uran

ce

Oth

er M

arke

t se

rvic

es

Non

mar

ket

serv

ices

EuropeProduction

EuropeEmployment

EuropeInvestment

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II.2 Sectoral results for Europe

Results for Chemical Products (in % Deviation w.r.t. the Baseline)

-10

-5

0

5

10

15

20

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Europe:Production ChemicalProd.

Europe:Imports ChemicalProd.

Europe:Exports ChemicalProd.

Europe:Employment ChemicalProd.

Europe:Total FactorProductivity Chemical Prod.

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II.2 Sectoral results for Europe

Results for Electrical Goods (in % Deviation w.r.t. the Baseline)

-15

-10

-5

0

5

10

15

20

25

2002

Europe:Production Electr.Goods

Europe:Imports Electr.Goods

Europe:Exports Electr.Goods

Europe:EmploymentElectr. Goods

Europe:Total FactorProductivity Electr. Goods

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II.2 Sectoral results for Europe

Results for Office Machines (in % Deviation w.r.t. the Baseline)

-10

-5

0

5

10

15

20

25

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Europe:Production OfficeMach.

Europe:Imports Office Mach.

Europe:Exports Office Mach.

Europe:Employment OfficeMach.

Europe:Total FactorProductivity Office Mach.

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II.2 Sectoral results for Europe

Results for Transport Equipements (in % Deviation w.r.t. the Baseline)

-10

-5

0

5

10

15

20

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Europe:Production Transp.Equip.

Europe:Imports Transp. Equip.

Europe:Exports Transp. Equip.

Europe:Employment Transp.Equip.

Europe:Total FactorProductivity Transp. Equip.

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II.2 Sectoral results for Europe

Results for Construction (in % Deviation w.r.t. the Baseline)

-6

-4

-2

0

2

4

6

8

10

12

14

2002

Europe:ProductionConstruction

Europe:ImportsConstruction

Europe:ExportsConstruction

Europe:EmploymentConstruction

Europe:Total FactorProductivity Construction

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II.2 Sectoral results for Europe

Results for Others Market Services (in % Deviation w.r.t. the Baseline)

-5

0

5

10

15

20

25

2002

Europe:Production OtherMarket Services

Europe:Imports Other MarketServices

Europe:Exports Other MarketServices

Europe:Employment OtherMarket Services

Europe:Total FactorProductivity Other MarketServices

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II.3 Macro-economic results for France

GdP And its Components for France (in % Deviation w.r.t. the Baseline)

-2

0

2

4

6

8

10

12

14

2002

GDP (Europe)

Final Consumption

Firms' Investment

Exports

Imports

GDP

34

II.3 Sectoral results for France

Sector Chemicals for France: (in % Deviation w.r.t. the Baseline)

0

2

4

6

8

10

12

14

16

18

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Europe:Production Chemical Prod.

France:Production Chemical Prod.

France:Imports Chemical Prod.

France:Exports Chemical Prod.

France:Employment Chemical Prod.

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II.3 Sectoral results for France

Sector Electrical Goods for France: (in % Deviation w.r.t. the Baseline)

-2

0

2

4

6

8

10

12

14

16

18

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Europe:Production Electr. Goods

France:Production Electr. Goods

France:Imports Electr. Goods

France:Exports Electr. Goods

France:Employment Electr. Goods

36

II.3 Sectoral results for France

Sector Transport Equipment for France: (in % Deviation w.r.t. the Baseline)

-2

0

2

4

6

8

10

12

14

16

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Europe:Production Transp. Equip.

France:Production Transp. Equip.

France:Imports Transp. Equip.

France:Exports Transp. Equip.

France:Employment Transp. Equip.

37

II.3 Sectoral results for France

Sector Construction for France (in % Deviation w.r.t. the Baseline)

-2

0

2

4

6

8

10

12

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Europe:Production Construction

France:Production Construction

France:Employment Construction

38

II.3 Sectoral results for France

Sectors Other Market Services for France (in % Deviation w.r.t. the Baseline)

-5

0

5

10

15

20

25

2002

Europe:Production Other Market Services

France:Production Other Market Services

France:Imports Other Market Services

France:Exports Other Market Services

France:Employment Other Market Services

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III Other results

EUROPE GDP : 12.14% Empl: 10 007 GDP : 12.65% Empl: 11 077 GDP : 11.14% Empl: 7 971

Res: 3 140 B. Bal.: 0.13% Res: 3 174 B. Bal.: -0.01% Res: 3 073 B. Bal.: 0.38%

FRANCE GDP : 7.06% Empl: 949 GDP : 7.32% Empl: 1 035 GDP : 6.53% Empl: 791

Res: 346 B. Bal.: 0.07% Res: 348 B. Bal.: -0.03% Res: 343 B. Bal.: 0.30%

GDP in % deviation w.r.t the baseline in 2030

Empl: Total Employment in thousands deviation w.r.t. the baseline in 2030

Res: Research Employment in thousands deviation w.r.t. the baseline in 2030

B. Bal : Budget Balance in GDP Points in 2010

V00 (33% to wages) V30 (0% to wages) V40 (100% to wages)

Sharing of productivity gains

40

III Other results

Variantes Partage de la Valeur Ajouté (Ecarts en % p/r à la base)

0,00

2,00

4,00

6,00

8,00

10,00

12,00

14,00

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

33%, GDP

33%, Emploi

0%, GDP

0%, Emploi

100%, GDP

100%, Emploi

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III Other results

EUROPE GDP : 16.28% Empl: 15 222 GDP : 12.14% Empl: 10 007 GDP : 10.89% Empl: 5 720

Res: 3 433 B. Bal.: -0% Res: 3 140 B. Bal.: 0.13% Res: 3 044 B. Bal.: 0.41%

FRANCE GDP : 9.79% Empl: 1 491 GDP : 7.06% Empl: 949 GDP : 6.14% Empl: 485

Res: 379 B. Bal.: 0% Res: 346 B. Bal.: 0.07% Res: 340 B. Bal.: 0.19%

GDP in % deviation w.r.t the baseline in 2030

Empl: Total Employment in thousands deviation w.r.t. the baseline in 2030

Res: Research Employment in thousands deviation w.r.t. the baseline in 2030

B. Bal : Budget Balance in GDP Points in 2010

Sensivity analysis on β

V10 : β = 0.025 + f(R/Y) 2010 :

0.075 ; 2030 : 0.141

V00 : β = 0.05 + 0.5*f(R/Y)

2010 : 0.075 ; 2030 : 0.124

V20 : β = 0.1

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III Other results

Variantes en fonction de beta (Ecarts en % p/r à la base)

0,00

5,00

10,00

15,00

20,00

25,00

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Beta=F(RD/Y), GDP

Beta=F(RD/Y), Employment

Beta=1, GDP

Beta=1, Employment

Beta=2, GDP

Beta=2, Employment

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III Other results

EUROPE GDP : 12.14% Empl: 10 007 GDP : 15.20% Empl: 13 867 GDP : 15.81% Empl: 11 180

Res: 3 140 B. Bal.: 0.13% Res: 3 273 B. Bal.: -0.81% Res: 3 298 B. Bal.: -2.63%

FRANCE GDP : 7.06% Empl: 949 GDP : 8.80% Empl: 1320 GDP : 9.48% Empl: 1 083

Res: 346 B. Bal.: 0.07% Res: 359 B. Bal.: -0.57 Res: 403 B. Bal.: -2.52%

GDP in % deviation w.r.t the baseline in 2030

Empl: Total Employment in thousands deviation w.r.t. the baseline in 2030

Res: Research Employment in thousands deviation w.r.t. the baseline in 2030

B. Bal : Budget Balance in GDP Points in 2010

V00 : Private Financing V01 : Public Financing V02 : Public Orders

Policy Implementation scenarii

44

IV. Conclusions

Exercise limited by some assumptions– No finance integration– Deterministic mechanisms– No reactions of other countries

Mecanisms and policy implementation scenarii give by comparison teachings allowing to ask new questions

45

IV. Global results

Two distinct phases:– Maturation

Expenditure multiplier Deepening of deficits

– Deployment of innovation effects Durable Growth

– Competitiveness– Internal demand

– The succession of the two phases limit the deficits

46

IV. Global results

GDP deviation from 10.9 % to 22.5%, in mean 15%

Growth Surplus of 0.5% per year

Potential growth Surplus from 20 to 25% in a context of labour force scarcity

47

IV. Global results

Employment increases of 10 Millions in mean

Research employment increases of 3,3 millions with respect to the baseline in 2030

Research employment increases of 4,5 millions between 2003 and 2030

48

IV. Global results

Expenditure multiplier (ex-ante) very high 6-8– Status of R&D expenditures with respect to the

stability pact

Modification of relatives performances of the different European Countries

49

IV. Specific results

Scenarii with a financing by the deficits are better, but limited interpretation of the results

– No feedback of deficits on GDP

50

IV. Specific results

Better performances for Europe in the case of absolute convergence

Less employment when R&D is totally realised in the private sector

51

IV. Specific results

Better results (GDP, employment) when productivity gains are kept by firms

– Competitiveness

– Substitution effect favorable to labour

52

IV. Sectoral Results

Contrasted results

– Equipment goods and chemicals very advantaged (intensive R&D, Exports)

– Consumption goods pulled up by internal demand

– Intermediary goods suffer of productivity gains

53

IV. Sectoral Results

Importance of public procurements

– Initial increase of deficits (public, external)

– But Growth, employment et high multipliers: Relance effect Concentration of R&D effort on high technological

sectors

54

IV. Sectoral Results

Better results if R&D effort is concentrated on high technological sectors:

– Better R&D productivity

– High externality transmitters Of knowledge (Knowledge spillovers) Of surplus transfers (Rent Spillovers)

– Less productivity growth for high labor intensive sector: strong employment growth